04 Apr Property Ownership Part 1: Joint Tenancy
Do you know how you hold ownership to your property? Most people are unaware of exactly the method by which they own their home or investment property. This is troubling, because depending on how you took title to the property, you have different legal rights. This is part 1 in a 3 part series on different ownership methods for 2 or more individuals. In this newsletter we will be discussing joint tenancy. In future newsletters you can expect to learn more about tenants in common and community property interests in property.
Usually during the purchase process, you, as the buyers indicate how you want to take ‘title’ to the property. Meaning, what type of ownership will you hold in that property.
Joint tenancy is a common form of co-ownership of a property where there are 2 or more people who own the property together in equal yet undivided shares. Every joint tenancy includes a “right of survivorship,” meaning if one joint tenant passes away, that deceased joint tenants share automatically will belong to the other tenant(s). This occurs by operation of law and no probate administration is required to transfer the share. The share belongs to the surviving joint tenant(s) irrespective of the deceased individuals will or trust.
What happens if you and your spouse own your home as joint tenants and you both pass away at the same time? Well, a simultaneous death will require the property to undergo a probate administration for both individuals.
Unfortunately, this is a common method of holding property for married couples, which can have significant negative results should both spouses pass away. Further, spouses who hold real property in joint tenancy miss out on taking full advantage of “step up in basis” tax benefits.
Unintended consequences can occur when joint tenancy is used as substitution for a will. For example, Mom owns property alone and transfer the property to herself and her two kids as joint tenants with the hope that when she passes away, her share of the property will automatically transfer to her children equally.
This is problematic for several reasons:
- As new owners of the property, the kids will have a right to manage the property alongside their mother, which may not have been intended.
- Most problematic is the exposure to her kids’ creditors.
- The transfer may have gift tax consequences.
- If one of the kids passes away, his or her interest will automatically be given to his/her sibling, which may not be what Mom intended, especially if the deceased child had his/her own children and Mom would have wanted her grandchildren to share in the property.
So, depending on how you choose to hold title to your real property, you are likely subjecting yourself to probate administration and putting yourself at a tax disadvantage. It is important to create a plan to address not only your ownership intent but your wishes should you become incapacitated or disabled.
If you have no idea how you own your property, simply contact our office a call and we would happy to provide you with this information.