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JOINT TENANCY CO OWNERSHIP OF PROPERTY: ADVANTAGES AND
DISADVANTAGES
Introduction:
Co
ownership of property in California can be accomplished by many
methods ranging from community property (for married couples) through
tenancy in common, to ownership by corporations, limited liability
companies, partnerships and trusts. After community property, JOINT TENANCY is probably the most
commonly used method…and the most abused. While holding property as
Joint Tenants is easily accomplished and, indeed, often automatically done
for customers by title companies, real estate agents and inexperienced CPAs
and lawyers, in reality it has significant problems and is seldom the best
way to jointly hold property. Put simply, both legal and tax issues often
arise to the shock and, at times, dismay, of those who “took the easy
way” and decided to keep jointly owned property as joint tenants.
This
article shall discuss the basic law of joint tenancy and analyze both the
benefits and the detriments of holding property in this manner. It shall
also suggest various alternative methods of holding title which solve many
of the problems of joint tenancy.
Definitions and Basics:
The
reader is invited to first review the article Real Estate
Ownership and Transactions in the United States which
discusses generally the methods of owning and buying and selling real
estate in this country. This article shall assume the reader has already
read that more basic article.
Co
ownership of property simply means two or more people or entities owning
title to property.
Co
ownership can be accomplished in many ways. Husband and wife, in California, normally own property as community property, the title deed
stating, “X and Y, husband and wife as community property,” and
this method has significant advantages described below. Only a husband and
wife can jointly own property as community property.
The
most common methods of co ownership of property aside from community
property are tenancy in common
and joint tenancy. Tenancy in
Common is ownership of title to property by two or more persons or entities
in any percentage amount. It is “undivided” ownership which
means that each person owns a percentage of the entire property. Thus, if
you own 40% of a property in tenancy in common, you do not own any
particular 40% of the lot but 40% of an undivided entire property. (Compare
this to condominiums in which you are given a particular title to a
particular space within a larger lot.) The reader should review the article
on
Tenancy
in Common Ownership of Property in San Francisco and Bay Area Communities.
Joint tenancy is equivalent to tenancy in
common with two vital differences. First the co ownership must be equal,
e.g. each joint tenant owns the same percentage interest. Second, unlike
tenancy in common, when one dies owning property as a joint tenant,
one’s portion immediately and automatically is transferred to the
other joint tenants by operation of law. This is called the right of survivorship. This right
of survivorship supersedes contrary provisions in a Will or Trust, for it
automatically vests at the moment of death…before a will can effect
disposition of the property. This causes significant problems in
litigation, as discussed further below. If one holds property as joint
tenant, but commits some error or takes certain acts in the holding of the
property discussed below, it automatically
converts the property to tenancy in common, even if unintentional and the
holder of title and the other joint tenants do not know of the act-another
problem discussed below.
Title
companies like joint tenancy since they are familiar with it. It does have
some advantages-but those advantages, discussed below, are often outweighed
by serious difficulties, often created by the relative ignorance of both
the owners and the title companies as to the legal effect and dangers of
holding property in joint tenancy.
The Advantages of Joint Tenancy:
1.
Ease. Title companies, realtors, and many attorneys are
“used” to using joint tenancy as a way for any two or more
persons or entities to own property. All that need be done is to place on
the title deed, “X and Y, as joint tenants” and the property is
effectively owned as joint tenancy. After hundreds of years of creating
such title documents, the professionals in the field feel comfortable with
that method. Attorneys are not needed to create the necessary title, unlike
trusts, partnerships or corporations, thus money was apparently saved.
2.
Transfer Immediate and Automatic Upon Death. There is no need to probate the estate or
perform other court hearings to achieve the transfer to the other joint
tenants upon death. By merely recording notice of the death of the joint
tenant, the survivors increase their holdings by the amount of the
decedent’s percentage interest, equally. (If I die and owned property
as a joint tenant equally with two other joint tenants, each of their one
third interests automatically increase by half of my one third, thus each
thereafter owns fifty percent, as joint tenants.)
3. No
Attorney Fees Incurred for Probating the Property. Before the advent of revocable living
trusts (See our article on Wills and Trusts)
joint tenancy seemed an excellent method of avoiding what often amounted to
thousands of dollars in probate fees paid to executors and attorneys.
Indeed, this was the usual justification given to owners by realtors, title
companies and banks. Since many couples now own property as community
property or use revocable trusts, both of which eliminate all or most of
the attorney fees, this justification has been largely eliminated but
remarkably few people realize it. Nevertheless, it is clear that the cost
of creating a joint tenancy deed and the cost of vesting title in the
survivors is minimal compared to probate costs or the cost of creation of a
trust, corporation or partnership.
4.
Predictable. Joint tenancy is
one of the oldest methods of owning property and the case law involving it
is hundreds of years old. One could easily predict what would occur in the
future should legal disputes arise.
5. Apparent
Simplicity. Since all one needs
to do to create joint tenancy is to record a title deed executed by all
joint tenants stating, “X and Y (and others) as Joint Tenants”
and since title companies and realtors are used to such title holding, it
seems easy and simple to create this form of ownership and can be done in
just a day or two.
The Disadvantages of Joint
Tenancy:
1. Restricted Ownership. Some
institutions, which do not “die,” may not be able to own
property in joint tenancy. This restricts many of the structures so useful
in family and estate planning.
2. Unexpected Rigidity in Ownership. Joint tenancy is not altered by will or
contract. The title document will void all later arrangements of the
parties unless they somehow terminate the joint tenant deed legally. Thus
it is one of the most common cases in court that someone either forgets
that property is in joint tenancy or is misinformed and writes a will
hoping to protect the family who discover, to their horror, that the will
or contract is void as to the property upon death. Typical example: someone
owns joint tenancy with an ex spouse, does not change the deed, dies, and
the new spouse or children are “wiped out” by the old joint
tenancy deed.
3. Unity
of Title Rule: This complex rule requires that each joint tenant must
own the same precise title since each owns an undivided interest. If that
unity is broken, then the property is converted to tenancy in common, even
if the person breaking the unity and the other joint tenants do not know.
Thus if I borrow and use the joint tenancy property as collateral, not even
telling the other joint tenants, and have a deed of trust recorded on
“my interest” this can be held to have voided the joint
tenancy, even if I pay it back. Imagine the chaos this could cause since
the other joint tenants, thinking that they would automatically get my
share if I die, would have made their own plans accordingly. Instead, the
property is now a “secret” tenancy in common and could end up going to my family or others
according to my will. There are numerous cases about this problem, with
each jurisdiction having different solutions and holdings, but suffice to
state that it can lead to very unfair results which are often unintentional
on the part of the parties.
4. Tax
Disadvantages There are several
tax problems with joint tenancy, especially when compared to community
property holding, but one example should suffice to indicate the
complications and costs that this “simple” method of ownership
can create.
One
pays income tax (capital gains) on appreciation on property. The initial
cost is the “basis” of the property and one pays taxes on the
difference between sales price and basis.
However, upon death there is a stepped up basis to value of date of
death. Example: I purchase a property for one hundred thousand dollars and
sell it for three hundred thousand. There is a two hundred thousand dollar
capital gains and taxes of about 30,000 would be due. However, if I die and
my son inherits the property, the basis is changed to value as of date of
my death ($300,000) and if my son sells the property the next day there is
no capital gains tax due at all.
Assume
I own the property in joint tenancy with you. You die. Do I get a stepped
up basis on the property? Yes, but only
for one half since I already owned one half as a joint tenant.
That
means the taxes in the example above would be fifteen thousand dollars.
Now, if
I owned that property as community property and my wife died. I get a stepped up basis in the entire
value even though I owned one half of the property. A special exception to
the law for community property allows a full stepped up basis in community
property…but only a one half stepped up basis in joint tenancy. If
you had owned the property with your spouse as joint tenancy instead of
community property, you just wasted fifteen thousand dollars.
But in
reality most property in this area is worth far, far more than three
hundred thousand, and the losses are normally in the hundreds of thousands
due to this common error.
5. Lack
of Benefit. By use of revocable
trusts, the corporate structure, family partnerships and other easily
drafted documents, almost all the benefit of avoiding probate can be
achieved for the same property without the disadvantages of joint tenancy
listed above. Put simply, the law has altered over the past five hundred
years and joint tenancy, which was useful in 1850, is now a dangerous and
not very useful way to jointly own property.
6. Lack
of Control. A joint tenancy can
be destroyed if any one of the joint tenants decides to do it. Under Civil
Code section 683.2 (a) a joint tenant, without the consent of other joint
tenants, may sever his or her interest in joint tenancy by execution and
delivery of a deed conveying the interest to a third party; by executing a
written instrument evidencing intent to sever the joint tenancy or
execution of a written declaration that the joint tenancy is severed. The
document must be recorded. But this means that your plans may be suddenly
destroyed at the will (or whim) of the other joint tenants at any time.
This
office confronted that issue when a dying client suddenly discovered by
chance that his brother (and co owner in joint tenancy) had already severed
the joint tenancy (not telling our client) and that our client’s
entire estate plan would have been distorted. He had not known that half
the value of the property he owned as a joint tenant, whose value exceeded
one million dollars, was suddenly not going to his brother but would end up
going into the residue of this estate in ways he did not want. That
evening, with the client going into and out of consciousness, desperately trying
to rewrite his will, is one that his family will long remember. As his wife
later said to the writer, “What would have happened if we
hadn’t been lucky enough to find out that night?”
“Simple,”
I told her, “you would have paid an additional two hundred thousand
dollars in taxes for no reason whatsoever.”
Why do
people still use it?
Because
banks, title companies, realtors, and inexperienced professionals have used
it over the decades and have not bothered to really think it out. Because it is easy to create and one does
not have to go to a lawyer to create a corporation or partnership or learn
how one can achieve the same things more efficiently and without
danger. In short, because it is “easy.”
Alternatives:
Depending
on the circumstances, trusts, partnerships, corporations, limited liability
companies and community property can all be used to better accomplish the
same goals and which allow better tax planning, control of your ownership,
and resolution of disputes. For instance, in a family partnership
agreement, it there is a dispute, one can provide for private arbitration
of disputes which allows a judgment just as effective as a court of law but
avoids the expense and publicity of a public trial. Instead of a dispute
lasting years and costing hundreds of thousands of dollars, a dispute is
resolved in months and costs a third as much.
There
are times when joint tenancy can be useful. If one has no time to create a
quick survivorship plan and the value of the property is small, it can be
an easy and fast way to create survivorship. But in the overwhelming
majority of cases, family and tax requirements make joint tenancy less
preferable to more modern methods.
Conclusion:
It is
perhaps ironic that a method of holding property that was innovative and
useful in England in 1805 is not only still widely used in California in
2003 but used without understanding its benefits and disadvantages. It is
rather like using a horse and buggy on a modern freeway. It can be done and
one does get there: but without the many advantages later developments have
made available. Law is like any other field of endeavor. It changes and in
many cases improves over the centuries. Joint tenancy is easy to create,
perhaps, but hard to manage and very dangerous to control compared to later
developments available for the intelligent owner of property.
The
wise consumer shops the market before buying a product. The wise property
owner should shop the other available ways to hold property before
“buying” joint tenancy.
These Articles are
to give the reader a general description of certain areas of the law. Legal
advice is necessary to apply these legal concepts to your particular
situation. The Reader should obtain competent legal advice before
relying on the Articles.
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