Neil Sedaka Was Right
Ending a relationship with a spouse or a significant other is always difficult at best. When the relationship is complicated by the ownership of valuable joint assets, the parties have to go through the process of either (i) selling the asset and dividing the proceeds; or (ii) making the necessary arrangements for transferring one party's interest to the other if that kind of settlement is possible. There are many spokes to the wheel of this topic.
Tenants By the Entirety
In New York, when a married couple takes title to a co-op or condo as husband and wife, the nature of that ownership is known as a "tenancy by the entirety". This type of ownership is unique to married people and protects married couples from attack by the creditors of one of the parties. In other words, a creditor can't try to attach one party's interest in an effort to satisfy an outstanding obligation. This protection would not be available if the parties had taken title either as "tenants in common" or as "joint tenants". As a result in most cases, unless there is an estate planning reason, a married couple will always take title as tenants by the entirety because of the protection from creditors. Since non-married or gay couples can't take title in that manner, other forms of ownership will be discussed a little later. In a funny way, one advantage of marriage is that there is a set of laws available to both parties when the marriage is coming to an end. The termination of the marriage is governed by the New York Domestic Relations Law, which allows the parties to settle their financial and family differences in accordance with those laws. Most parties do not enter into an agreement prior to marriage to deal with financial issues that may arise in the event the marriage does not work out. That type of agreement is known as a "prenuptial agreement". A prenuptial agreement is usually entered into where one party, by inheritance or earnings, has significant assets that have been accumulated prior to the marriage. Parties often want those assets segregated in the event of divorce or want to negotiate what each party will receive from those assets in the event of divorce. When a party has big bucks, money conversations often take place and a pre-nuptial agreement negotiated and entered into. In any event, when a marriage goes south and the parties can't agree on the division of assets, such as who will reside in and/or own the coop or condo after the relationship terminates, the Domestic Relations Law is available to guide the parties through a divorce proceeding. Eventually (and eventually can be a very, very long time), a settlement is reached and the real estate owned by the couple will be sold or transferred.
What Happens if You're Not Married?
Unmarried couples have two choices as to how they can hold title to an apartment.
Tenants in Common
When ownership of an apartment is held as "tenants in common", the interest of each party is theoretically transferable by either party. More importantly, upon the death of either party, the deceased party's interest in the apartment does not automatically transfer to the survivor. If the deceased owner did not make provision in his or her will for the transfer of his or her interest in the apartment to the survivor, the interest in the apartment would transfer through the estate of the deceased party and ownership would vest as provided in the party's will, or if the party did not have a will, then pursuant to New York's laws of intestacy (that is, the laws that apply when someone dies without a will). Obviously, this could be a major problem if someone's failure to provide for his or her partner was an oversight (more on that issue later). Married couples often use this form of ownership for estate planning purposes, in order to equalize the size of each spouse's estate.
Joint Tenancy with Rights of Survivorship
The other way for unmarried couples to take title is as "Joint Tenants With Right of Survivorship". When title is held is this manner, the interest of the deceased party will transfer to the surviving apartment owner by "operation of of law". In essence, that means automatically. Although the legal representative of the deceased party will need to provide the purchaser's attorney, managing agent and title company (in the case of a condo) with the IRS and New York State estate tax lien release documentation relative to the property being transferred, the property will transfer to the surviving apartment owner without the need for the estate of the deceased apartment owner to be probated.
Which Way is Best?
The answer to this question will depend upon the facts of each relationship. Each party's tax and legal advisors should be consulted to make sure that all relevant issues are explored before a decision is made. If the parties intend that the other person is to own the apartment if one party dies, it is essential that title be held as joint tenants with rights of survivorship. If the parties want others to benefit post mortem, then a tenancy in common is the better choice. Again, each situation is different and should be reviewed thoroughly before a decision is made.
A Reason to Get Married
As mentioned above, there is an unexpected benefit of marriage. When title to an apartment is held as a tenancy by the entirety, the creditors of one party cannot seek to place a lien on the other party's interest in the unit. Other forms of ownership are subject to attack by creditors. Accordingly, unless there is a strong estate or tax reason why a married couple would not want to hold title as tenants by the entirety, that form of ownership should be used for married couples.
Things Don't Always Work Out
Married or not, many relationships just don't pan out. As mentioned above, married couples have the protection (at least in theory) of the Domestic Relations Law to work things out if the parties can't cooperate. What happens to unmarried couples and their jointly-owned real estate? In short, it's a mess. As joint-owners of a co-op or condo, if the parties could not agree to the sale of the apartment or to some other arrangement by which one party purchased the other party's interest, the couple could find themselves in suspended animation. Neither party could be forced to sell the apartment, so a war of attrition would begin until one person caved in and just did what the other party wanted. Things could get worse if the parties were sharing expenses and one of the parties decided that he or she did not want to incur any more costs. What's the solution?
The Owner Occupancy Agreement
Although it's never easy separating parties from their real estate, there is one protective measure that can help out. Unmarried couples who are purchasing real estate together should consider entering into an "owner occupancy" agreement, to provide for all facets of ownership of the apartment. Here's a partial list of issues that should be addressed in such an agreement:
A description of each party's ownership interest in the apartment (50-50, 60-40, etc.)
A description of how the parties will share expenses and tax benefits.
A description of how the parties will share repairs and capital improvements to the apartment.
A description of what will happen in the event of a party's death or incapacitating disability.
The rights, if any, of others to use or occupy the apartment.
The rights of either party to demand the sale of the apartment or the buy-out of such party's interest in the apartment.
How the parties will resolve disputes (litigation, arbitration or mediation).
- Any other issues that are particular to a couple's ownership of the apartment.
If the above document is properly prepared, the parties will at least have a road map if things start to get a little shaky or if things break down completely. Of course, if a party refuses to abide the terms of the agreement, chaos will prevail until the parties are forced to resolve their differences the hard way (litigation, arbitration or mediation.).
A Word About Disability
It's not fun to talk about, but bad things can happen to good people. Both married and unmarried couples should make provision for the disability of one of the parties. If a person cannot act for him or herself because of a serious disability, the person's partner has to be authorized to act for such person, or someone will need to be appointed by the court to do so. To avoid this terrible result, the parties should consider executing mutual "durable powers of attorney", that will be effective when a party becomes disabled. This "power of attorney" designates someone as the other person's "attorney-in-fact" and allows the designated person to perform enumerated acts for the person granting the power (sign checks, transfer property, or execute documents, just to name a few powers that can be granted). The circumstances of each relationship can differ, so the execution of a power of attorney should be reviewed carefully with your legal and financial advisors. The above being said, the form of "power of attorney" is in a state of flux at the moment, as recent amendments have made the use of the power more complicated for various technical reasons that I won't go into here. As designating someone your "attorney-in-fact" has significant and serious legal consequences, a power of attorney should not be executed without consulting your attorney.
The parties must also consider preparation of wills and other estate planning documentation, so that the transfer of a party's interest flows naturally at a very difficult time. Poor estate planning can leave your loved ones scurrying about trying to figure out a deceased partner's previously undisclosed financial situation. It can get complicated and ugly. Again, consult your financial and legal advisors to make sure you understand and anticipate your estate planning needs.
Residential Reality: Unmarried Couples Should Consider the "What-if's"
Unmarried couples who own co-ops or condos together should seriously consider entering into an owner-occupancy agreement in order to protect each party's interest in case of the unthinkable. When things sour in a relationship, cooperation is a rare occurrence. Dealing with these issues in advance can avoid a lot of unnecessary pain and suffering when you're dividing up the pad and the pooch.