We kicked off our blog series on Estate Planning, in honor of National Estate Planning Awareness Week, with an introduction to what estate planning is, why it’s important, and what it involves, check out that post here.
Yesterday we turned to Beneficiary Designations for retirement assets and life insurance and discussed why these are so important to Estate Planning.
Continuing our series on Estate Planning, today we’ll discuss joint ownership of property.
There are three main types of joint ownership, Tenants by the Entireties, Joint Tenants with Rights of Survivorship, and Tenants-in-Common.
Tenants by the Entireties is only available to married couples, and it is the default way married couples own property. Property owned “by the entireties,” is owned by both spouses in whole, and when one spouse dies the property passes to the surviving spouse by operation of law (outside the deceased spouse’s probate estate). This also means that one spouse cannot give the property to a third-party by Will (or really any other document) without the other spouse’s consent. One important aspect of Tenants by the Entireties property is that the property is generally not available to creditors unless both spouses are liable for the debt.
Joint Tenants with Rights of Survivorship is similar to Tenants by the Entireties, however it is used for non-married persons. Each joint tenant has equal rights to the whole, and on the death of one joint tenant the property passes automatically to the surviving joint tenant(s) (again this occurs outside the decedent’s probate estate). However, a joint tenancy can be severed or terminated by any of the Joint Tenants, by obtaining a judgment for the partition of the property, by a joint tenant selling his or her interest, or by execution of a judgment against a joint tenant’s interest in the property. If a Joint Tenancy is severed or terminated it becomes a Tenancy in Common.
Tenants in Common is very different from the first two, because each Co-Tenant has a dividable interest in the property. Also, the interests do not need to be equal (i.e. halves, or thirds), but often are. Importantly, there are no survivorship rights in a Tenancy in Common, and on the death of a Co-Tenant that property becomes part of the decedent’s probate estate. For example, if siblings own property as Tenants in Common and the sister dies, the sister’s interest passes with the rest of her probate property in accordance with her Will (or by intestacy is she doesn't have a Will).
While not technically a form of joint ownership (and I think increasingly rare) I want to touch on Life Estates and Remaindermen. A life estate is an interest in property wherein the life tenant has exclusive possession and use of the property during his or her life. On the life tenant’s death the property passes to the remaindermen by operation of law and outside the life tenant’s probate estate. While a life tenant can generally sell, lease, or mortgage his interest in the property, he can only do so with respect to his life interest, which can make such transactions difficult, in a practical sense, without the consent of the remaindermen. You cannot properly plan for your estate if you do not understand how property is owned, and thus how it passes on your death. Also, each of these forms of ownership can be used in the estate planning process to achieve different objectives such as probate avoidance, asset protection, estate equalization, business succession, and even tax planning. That said, there are often alternatives to joint ownership of property which may in a particular instance make more sense, such as the use of leases, installment sales, partnerships or other business entities, and trusts.
As always, if you have questions about estate planning in general, or would like to meet with us about creating, changing, or just updating your estate plan, or are interested in learning about transfer tax planning, please contact Tim White or one of our other estate planning attorneys to schedule a consultation.