REAL ESTATE: Buying a Home in Someone Else’s Name
As real estate attorneys, we frequently hear “my house is in my mother’s name,” “I used my friend’s credit to buy my house,” or something along those lines. It is quite common for people to “borrow someone’s credit,” or title a property in someone else’s name, and the reasons behind it are understandable enough. The purpose of this article is to make you aware of the implications of using this common, but dangerous technique.
I. Asset Protection
Let’s say you have the resources to buy a house but there is some reason you do not want your name on the title to the property. Maybe there is a risk of creditors finding out and forcing the sale of the property to pay back a debt, or one of many other reasons for wanting to keep your involvement confidential.
When it comes to asset protection, there is a wide spectrum of techniques, ranging from the very simple to the very sophisticated. Using someone else’s name is pretty much the bottom rung.
Using the name of a family member or close friend is quick, easy and cheap. There is no need to involve an attorney or set up any kind of entity (i.e. LLC or trust). The allure is undeniable but . . . there are some drawbacks.
II. The Double-Cross
The obvious risk is the possibility that the person whose name you use will decide to keep the property. If that happens, there probably will not be a whole lot you can do about it. After all, for legal purposes, the property belongs to the person who is on title.
You will need to file a lawsuit and present all the evidence that you actually paid for the property and that, in equity, you are the real owner. Maybe you can convince the judge . . . but, then again, the purchase could simply be seen as a “gift.” How are you going to overcome that argument?
Believe it or not, my firm is dealing with a case right now where the mother is trying to double-cross her own son in just this way.
Let that sink in.
III. Spouses & Heirs of the Person on Title
Naturally, you will carefully select the person whose name you are going to use, so maybe you think a double-cross is unlikely. After all, this person is a loved one.
Your own mother is going to steal your house, right? Okay, but what happens when your mother re-marries and your new step-father has ideas?
It actually is not all that common for clients to complain of the trusted person betraying them, even though fallings out are certainly a part of life. It is much more common, however, to hear stories about problems with an in-law or the heirs of the trusted person. After all, it is not up to you whom your relative marries, or when he/she might die.
When this situation comes up, there are at least two negative consequences. First, your asset is exposed. You could very easily lose it.
Second, your trusted person is caught between two opposing forces — both loved ones — just for doing you a favor.
In that deal, all the people you care about lose.
IV. Creditors of the Person on Title
Don’t forget that, while you might put the asset out of reach of your creditors, you are exposing the asset to the creditors of the person whose name you use — that includes past, present and future creditors.
Are you going to diligently monitor the trusted person’s debts on an ongoing basis? Do you really know everything in that person’s past? And, what about unexpected circumstances like an accident or bankruptcy filing?
The debt your house ends up paying for might not even be something voluntarily acquired. For example, if your trusted person is at-fault in a car accident and there isn’t enough insurance to cover the damages, you can bet the injured party will be going after any and all assets your trusted person has. At that point, it’s too late to transfer the property out of the trusted person’s name. (You can try, but it probably won’t work).
And then there is bankruptcy. Try explaining to a trustee that the home doesn’t really belong to the bankrupt debtor. Good luck with that.
The trustee’s job is to marshall all assets available to pay creditors. Even if the trustee is sympathetic — which she probably will not be — she has to do her job. Expect no mercy.
V. Borrowed Credit
The other common reason a home might be titled in the name of someone other than the person paying is lack of good credit. That might be a little more understandable . . . though still fraught with peril.
You probably have to come up with a sizable down-payment, so it’s not like you don’t have anything to lose.
Now, if the only way to get the property is with someone else’s credit, then my only suggestion would be to have your trusted person as a co-signer rather than the person on title.
Since the home is financed, then your exposure is limited to the equity in the property. Now, with property values on the rise, that equity could be a large amount of money. So, I’m not saying the risk is nominal, but at least you will not lose the entire investment. I guess that is something . . .
You could build in some additional protection by including your name on the title and/or registering the property as a homestead. And, you could have the trusted person name you as the beneficiary of the property in his/her will or trust.
VI. Morale of the Story
These common practices are just not smart, folks. There are better ways to accomplish your goals. And, that is why God made attorneys.
When it comes to asset protection , setting up a trust is a much smarter way to maintain confidentiality. You can easily avoid the pitfalls described above. Yes, it will cost a little bit of money, and you will need an attorney, but we are talking about a significant investment here, right?
We hear sad stories in our office every day. Would you rather pay your attorney a little bit at the outset or a lot later on when something goes wrong?