A Quick Guide to Joint Tenancy With Right of Ownership

As the allure of investing money in something tangible increases, the US has seen a gradual increase in homeownership rates since its dip in2016. In 2022 and 2023, the rate of house ownership reached the highest level since 2011. This includes properties owned individually as well as joint tenancy with right of survivorship.

At the end of 2022, the rate of owner-occupied households stood at 65.9%. A majority of property owners have some sort of legacy plan where the spouse will get ownership of the property in case of owner's death. This legacy plan may either be in the form of a will or a Joint Tenancy with Right of Survivorship clause in the ownership contract.

This article aims to provide a guide to understanding the intricacies of joint tenancy. We will discuss the benefits, disadvantages, and risks associated with this type of agreement.

Understanding Joint Tenancy with Right of Survivorship?

The concept of joint tenancy with right of survivorship is a legal agreement that allows two or more parties to share ownership of property. This agreement can encompass not only real estate, but also bank accounts, brokerage accounts, or any other asset.

Under this arrangement, co-owners hold undivided interests in the property. This means that the people signing the contract co-own the entire property rather than holding distinct percentages. The co-owners can be any two individuals, be it friends, family, or even complete strangers.

One of the distinguishing features of joint tenancy is the right of survivorship. This right dictates that in case of one owner's death, the interest/share of said owner automatically transfers to the surviving co-owner(s). Unlike traditional legacy plans, there is no need for court or probate proceedings.

This means that compared to simply transferring assets via a will or trust, joint tenancy with right of ownership means that there is no need to go through a protracted or complicated legal process for the validation of the contract/will. The only determining factor is who co-owns the property.

Joint Tenancy Vs. Tenancy in Common

Tenancy in common is a similar form of property ownership but with significant differences from joint tenancy. Unlike joint tenancy, tenancy in common involves ownership based on percentages, allowing for the trading of shares and the addition of new tenants over time.

In the unfortunate event of a tenant's death in a tenancy in common, their share does not automatically pass to the other tenant but is distributed according to their will after the probate process. Conversely, joint tenants with the right of survivorship do not encounter the complexities of probate. This makes joint ownership with right of survivorship a more seamless and straightforward arrangement.

How Does Joint Tenancy Work?

Joint tenancy is often established when individuals decide to jointly own a property. These individuals may be:

• Married couples
• Friends
• Family members
• Business partners

The co-owners sign together on a deed or title, ensuring each party holds an equal share of the property. It is important to note that on face value, both parties hold an equal share of the property. This means that joint tenants enjoy equal benefits and responsibilities regarding the entire property. If the property is rented, revaluated, or sold, both owners are entitled to an equal share of the profit.

Additionally, each co-owner is responsible for costs such as mortgage payments and property taxes. Should one party fail to meet their financial obligations, the other co-owners are equally responsible for covering those costs and any potential debts incurred by the defaulting party.

Benefits of Joint Tenancy

Joint tenancy offers several advantages, including:

Right of Survivorship: The right of survivorship ensures that when one owner/tenant passes away, their property share gets transferred to the other co-owner, no questions asked. This simplifies the process by avoiding probate, a legal procedure for validating a deceased owner's will.

Equal Rights to Property: Joint tenants with right of ownership means equal rights to all owners. During or after the shared ownership, the property shares or interests must always be distributed equally. There is no risk of a larger ownership percentage. This is particularly beneficial in group joint tenancies, such as joint ownership of community property. While the costs of renovations and repairs may also be shared, it also means that the resulting capital gain will also be shared by the co-owners.

Sharing Responsibility For Better Security: The co-tenant(s) in a joint tenancy share any and all financial responsibilities for the property, which may include estate taxes, property taxes, and debts. This setup prevents one tenant from taking out a mortgage loan on the property and leaving the other tenant with the debt, thus creating added security for both tenants.

Disadvantages of Joint Tenancy

Despite its advantages, joint tenancy comes with its own set of disadvantages:

All Parties Must Consent to Sale: Selling a property purchased via a joint tenancy agreement with right of ownership can be complicated. This is because the property cannot be sold by one owner without agreement from the other. This issue frequently arises in divorces involving joint tenant couples.

Survivorship Can't Be Altered: The right of survivorship clause in a joint tenancy agreement means that the co-owner who passed away can only transfer ownership to the surviving tenant. The surviving owner retains all rights to their interests.

Debt Sharing: In a joint tenancy agreement, any and all debts related to the property need to be shared. If you share a bank account in a joint tenancy, you are also responsible for any debts incurred by your co-tenant in association with that account. This also means that the credit score of one individual may impact the credit capabilities of another.

This, in turn, may lead to several risks for the owners as well. These may include:

Loss of Control: Co-owners in a joint tenancy arrangement are not able to sell or transfer their share on their own. Instead, they need the consent of all other joint tenant(s) as well.

Long-Term Consequences: One of the most prevalent long-term consequences of a joint tenancy is that it results in disinheritance of heirs. If, for example, you put your property in joint tenancy with one of your children, and that child passes away before you, their share will automatically pass to their heirs, not to your other child.

No Protection Against Creditors: While joint tenancy may offer some creditor protection, it is not foolproof. Creditors may still be able to seize the property held in joint tenancy.

Gift Tax Implications: Transferring property into joint tenancy can be considered a gift, potentially triggering gift tax implications.
Loss of Tax Benefits: Joint tenancy may result in the loss of certain tax benefits, such as tax deductions or exemptions. Consultation with a tax professional is essential before opting for joint tenancy.

Conclusion

Joint tenancy with right of survivorship can be a valuable tool for individuals looking to streamline property transfer and avoid the complexities of probate. However, it is essential to carefully weigh the potential risks and benefits before entering into such an arrangement.

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