Let’s just get right to the point; joint tenancy is a legal arrangement involving two or more individuals co-owning property. All parties share equal rights, title, and obligations. “Property” can include bank accounts, businesses, or personal items but joint tenancy most often pertains to real estate.
These ownership arrangements can be made between business partners, married or unmarried couples, friends, or family members. Joint tenancy also includes right of survivorship. This means that if one owner passes away, the surviving owner(s) can immediately take ownership without going to probate court.
Right of survivorship is an important distinction of joint tenancy when compared to other co-tenancy options. It carries certain benefits and drawbacks depending on the owners’ financial situation and ownership goals.
There are four requirements to establish joint tenancy.
All four criteria must be met in order to create a joint tenancy. If one is not met, the arrangement will fall into a different joint ownership category.
In real estate, joint tenants share the responsibility for paying off any loans and the property’s value is divided equally. In joint tenancy of bank and brokerage accounts, all parties have equal access to the funds. Any party involved in brokerage accounts can perform investment transactions at their own discretion.
Because all parties share equal ownership, the property cannot be sold without support from the other owners. However, tenants can transfer ownership to another person, thus severing the joint tenancy contract. New joint owners can then enter into another co-ownership plan called tenancy in common, a joint tenancy alternative that we’ll discuss later.
The right of survivorship inclusion ensures that when one owner dies, their portion of ownership is automatically passed to the surviving joint tenants. This element supersedes any instructions left in the deceased’s will, so property cannot be transferred to heirs. This expedites the transfer of ownership process because the co-owners can sidestep probate court with minimal effort.
When ownership is transferred, the remaining joint tenants will share equal ownership of the deceased’s portion as well as responsibility for any related debts. When the tenancy is reduced to a single owner, that person can bequeath ownership as they see fit through their will.
Transfer of ownership under rights of survivorship is not complicated but steps may vary depending on the type of property in question. The surviving co-owner(s) automatically own the deceased’s shares. However, clarifying ownership changes on record may still be required
With real estate, in order for the deed to accurately reflect the new ownership, the survivor will need to file one or both of the following documents with the appropriate government office:
Joint tenancy can be an ideal situation for many but also create issues for others. Consider these positives and negatives of a joint tenancy arrangement. Let’s first take a look at the potential positives.
All co-owners are equally responsible for paying off debts related to the property in joint tenancy. This legal requirement of joint owners ensures that financial responsibilities are shared, making ownership much more affordable. At the same time, this protects a co-owner from having a partner maliciously attempting to leave them with a load of debt.
Pursuing joint tenancy also raises loan approval odds. Having additional owners can affect qualification criteria such as debt-to-income, which can lead to both a loan approval and a better interest rate.
When someone dies, their assets are held until the probate court interprets their will. They decide if the will is valid and what assets and liabilities are to be transferred from the deceased. Any remaining assets are distributed to heirs according to the will’s direction.
The process is more complex when there is no will. Without any indication of how to disburse assets, the court must research and decide how to divide property. This can add more time to an already lengthy probate process, keeping beneficiaries from receiving their share until its resolutiom.
Because joint tenancy automatically transfers to the co-owner, often a spouse or business partner, the property does not become part of the probate process. For those needing funds or decision-making power immediately, this is a significant benefit of joint tenancy. In business cases, it assures a fluid transition to new ownership and avoids disruption of the business.
Now let’s take a look at a few of the potential drawbacks:
Probate on property is avoided when there is at least one surviving member in the agreement. However, when they pass on, the property will go to probate court if no other estate planning documents are in place. The sole owner can update their estate plan to include the property as an inheritance but the process, and all inherent delays, will be inevitable.
Divorcing spouses or acrimonious business partners often try to take control of shared assets. While joint tenancy decreases the potential for abuse, it can create challenges when all parties have to agree to any movement of shares. The property cannot be sold without everyone’s approval.
If a co-owner loses a job or falls into financial hardship, the other owners are still responsible for keeping up with the mortgage and other debt payments. Furthermore, if a joint tenant fails to pay taxes, the IRS could place a lien on the property.
When a non-spouse is given joint tenant status, the value they are given is subject to a gift tax. If someone with a $100,000 property makes a friend a joint tenant, for example, they will be subject to a gift tax on the $50,000 they are giving.
Joint tenancy can also cause income tax benefits to be lost, along with exclusions for estate and capital gains taxes in certain states. If a property is held in joint tenancy, the surviving owner has to pay income taxes in the event of a sale. Heirs, however, can sell property without paying that tax.
Joint tenancy may be the best choice in many situations. However, courts and many individuals prefer the flexibility of a tenancy in common arrangement. There are some key differences between joint tenancy and tenancy in common, with the latter boasting major advantages:
Dubbed the “poor man’s will”, joint tenancy developed a reputation as an inelegant — and inadvisable — method of bequeathing assets. Rather than draw up a will, owners can just add heirs as co-owners, circumventing an otherwise drawn-out court process. For many reasons, joint tenancy for these purposes is not recommended.
So when does joint tenancy make sense?
Joint tenancy can work well for spouses specifically for the right of survivorship. When a spouse dies, especially suddenly, avoiding the probate process can be seriously advantageous for a widower in need of money. In cases where co-owners share mutual respect, a common vision, and long-term goals, joint tenancy can be a sound option.
Property ownership is an investment strategy that deserves thoughtful consideration. Numerous opportunities exist for you to take advantage of the financial benefits of ownership, even if you feel that your financial or credit situation is disqualifying.Talking with an attorney or financial planner is the first step in discovering how to enjoy the perks of investing. To start on your path, schedule a free financial assessment with NextGen-Wealth today.
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