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Tenancy in Common & Joint Tenancy: Pros & Cons

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Tenancy in common

Don’t use this method as an asset protection device to hold your personal residence. Each spouse has a separate, but, undivided interest in the property. Each owner of property held as Tenants in Common owns an “undivided interest” in the property by a separate deed. For example, three people (all with separate families) own a vacation home as 1/3 owner, each Tenant has VESTED OWNERSHIP by his own deed/title to his share.
What’s wrong with tenancy in common:
Each tenant in common interest is an asset of each co-owner and is subject to each of his/her co-owner creditors. That’s simply too much risk, not only do you have to worry about your creditors, you have to worry about each of you co-owners creditors.
Interest in the property may be transferred by will. The ownership interest of a tenant in common is transferable. Unlike a joint tenancy, if a tenant in common dies, the interest in the property would pass to the heirs like all other asset or personal property.
All tenants have equal right to possession. The main problem with Tenants In Common is that the other tenant(s) can do whatever he/she wants with his/her interest. Like what? One tenant-in-common (T.C.) could take out a loan on his/her interest in the property. Additionally, the T.C. interest owned by one owner is subject to that owner’s creditors. So, if T.C. named John, owns a 1/2 interest in a $500,000 vacation condo as T.C. with his brother Frank, John’s 1/2 interest can be taken from him in a lawsuit or normal negligence case. There is no protection of that interest.
Summary of Tenancy in Common: Don’t use it. Tenancy in Common is NOT an asset protection device. The risk of separate ownership is the risk. You have no control over the final outcome. In cases where there are multiple owners, it’s difficult to have a consensus opinion acting as one without the risk of diverse opinions.

Joint tenants

Don’t use this as an asset protection device for your personal residence. Joint Tenancy (JT) is also known as Joint Tenancy with right of survivorship, is the most common method of holding title to real estate, bank accounts, broker accounts, and other assets. The problem here is that each spouse can wipe out the other, i.e. by withdrawing all of your joint money out of the bank account.
In PLAIN ENGLISH, owning property as a J.T. allows each J.T., each person the same equal rights of legal enjoyment, such as:
The right to use the “whole” property (with land, the right to occupy the entire property, with stocks or bank account money, or any other liquid investment, the right to “spend the whole amount, without prior permission.” Hello!, divorce?
The right to transfer the interest in the property “without asking permission” of the other co-owners.
A survival right, such as when a joint tenant dies, the share of the deceased tenant “automatically becomes that of the other co-owners.” Normally between married couples this is not a bad thing but owning other real estate with a joint tenant such as a vacation home is not a good idea because the other joint tenant’s family will receive title to the property.

Why is joint tenancy used? Simple: It avoids probate.

That sounds wonderful. So why shouldn’t we consider joint tenancy?
Joint Tenancy is uncontrollable. If one Joint Tenant sells his portion of the asset you have no power to sever your portion of the asset. You’re stuck with the new Joint Tenant.
Possible exposure of the assets to the creditor of the other Tenants. This is dangerously significant because any Tenant can transfer the asset (the whole asset) to someone/anyone without permission from any of the Joint Tenants. An example: your co-owner get sued by a business partner and gets a judgment against him, there are two options, one is that the creditor can ask the court to sell the asset to satisfy his claim of which you have no say in the matter, or you get the creditor to become your new co-owner. The bottom line is that Joint Tenancy is subject to the creditors of each co-owner.
Title in Joint Tenancy supercedes any provisions of a will. Joint Tenancy disinherits all other heirs, except the remaining Joint Tenant. This arises most often when a parent is trying to avoid probate and estate taxes on a piece of property and wants to give an equal share in the property to the children. The Joint Tenancy will supersede any provisions of the will.
Loss of estate tax protection.
Loss of step-up in basis upon the death of the first Tenant. You bought the house for $100,000 some years later the cost basis is still $100,000 there’s no step-up in basis at the time of death to restructure the tax consequences.
Possibility of a gift tax consequence may result from the transfer of property into Joint Tenancy.
Joint Tenancy supercedes any trust with the loss of all trust benefits.
Summary on Joint Tenancy: don’t use Joint Tenancy as an Asset Protection device. Although most married couples use this method of holding property as joint tenants, it’s not the best way to hold the marital property.
In subsequent articles we will discuss holding title by a Personal Residence Trust, Revocable Trusts, Irrevocable Trusts, Limited Liability Companies, and Corporations , and equity stripping as a way to hold the marital personal residence
Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.
Category: Financial Planning

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