Joint Ownership of Real Estate: Good Idea, or Potential Disaster?

For many people, the largest asset they own is their home or other real estate. One question we often receive from clients is whether they should put an adult child or other family member “on the deed” to their property to make estate planning simpler. There are pros and cons to joint ownership of real estate, and it’s important to know what you are getting into before you decide to make someone a joint owner of your home, vacation cottage, or investment property.

What is Joint Ownership of Real Estate?

There are multiple ways that real estate can be owned jointly with another person or persons. For the purposes of this article, we are focusing on what’s called “joint tenancy with right of survivorship,” sometimes referred to simply as “joint tenancy” or JTWROS.

In joint tenancy with right of survivorship, two or more people own an equal, undivided interest in a piece of property. When one of the joint owners dies, ownership of the property passes directly to the other owner or owners without any further action being taken or any special legal process.

What is an “equal, undivided” interest? Essentially, that means that each owner is entitled to possess and use the whole property during their lifetime. One joint owner can’t own 60% of the property, say, or just the first floor. The percentage of ownership depends on the number of owners; if there are four owners, each has a 25% share, for example. If there are two owners, each has a 50% share.

While all joint tenants have the right to use or possess the property during their lifetime, all joint tenants must agree to take certain actions regarding the property, like selling and mortgaging it.

Advantages of Joint Tenancy with Right of Survivorship

The biggest advantage of joint tenancy is the fact that it allows ownership property to pass to a surviving joint tenant without probate or other legal action upon the death of the other joint tenant. If avoiding probate is important to you, that is a big deal.

Another benefit of joint tenancy is its simplicity. In order to create a joint tenancy, all you need to do is execute a deed that transfers the property from you, as sole owner, to you and another person as joint tenants with right of survivorship. In theory, you could do this without an attorney, although when it comes to large assets like a home or parcel of land, it’s worth the investment in an attorney’s fee to make sure you’re not making any mistakes that could come back to haunt you.

Considering the ease of creating a joint tenancy, and its effectiveness in avoiding probate, you might wonder why anyone wouldn’t use this simple tool to transfer real estate. Before you rush off to do DIY estate planning through a joint tenancy with right of survivorship, keep reading.

Risks of Using Joint Tenancy for Estate Planning

In fact, many people do use joint tenancy for estate planning, but the truth is that it is a risky proposition on many levels they may not have considered. Here are some compelling reasons not to use joint tenancy as an estate planning tool.

Lack of Flexibility

One significant issue with a joint tenancy is that once you have created it, you can’t undo it without the other owners’ consent. That means that if for any reason you no longer want to share ownership, or you want to leave the property to other family members in your will, you are probably out of luck. If you decide down the road that you want to sell the property, you cannot do so unless all other joint tenants consent.

Co-Owners’ Creditors

One very real risk many people don’t consider before creating a joint tenancy is the possibility that their co-owner’s creditors may be able to reach the equity in the property. Let’s say you’ve paid off your primary residence, then make your adult son a joint tenant for estate planning purposes. If he causes an accident and gets sued, your house is, legally, his property, and his judgment creditor could put a lien on it or potentially even force a sale. This is true even if your son has not invested a penny in the property.

Potential Tax Implications

When you leave your house to someone in your will or trust, upon your death they receive a “step up” in tax basis, which reduces their capital gains tax liability if they sell the property. If you transfer the property by creating a joint tenancy, your joint tenant may not receive that step up in basis upon your death, and could be facing a much greater tax burden.

Also, if the person you are adding to your property as a joint tenant is not your spouse, the government may deem the transfer a gift, which could make you liable for gift tax.

Potential Conflict with Joint Tenants

As the sole owner of your home, you are the king (or queen) of your castle. When you create a joint tenancy, you are not the only one who has a say regarding that castle anymore. While your co-owner(s) may not be able to take certain actions or make certain decisions without your consent, disagreements have the potential to create serious rifts in your relationship—not what you want, especially with your adult children.

Unintended Consequences

When you create a joint tenancy, you remove the real estate involved from your probate estate; that may, in fact, be one of your reasons for creating a joint tenancy. If your will divides your property “equally among my children,” but only one child is the joint tenant on your real estate, that child will receive a much greater portion of your total assets, which may not be what you intend. And even if that child promised to share the house or its sale proceeds with their siblings, there is no legal mechanism to force them to do so.

Alternatives to Joint Ownership of Real Estate for Estate Planning

The bottom line is that there are simply too many things that can go wrong if you decide to use a joint tenancy as an estate planning tool, and all of what you likely hope to achieve can be accomplished with other tools, such as a living trust. A trust allows you to maintain control of your real estate during your lifetime, and your successor can transfer the property seamlessly to your intended beneficiary after your death (or continue to manage the property for their benefit).

Another planning tool that accomplishes many of the same goals as joint tenancy is a transfer on death deed (TODD), also called a beneficiary deed. As with joint tenancy, property passes directly to the intended recipient (beneficiary) on the owner’s death without the need for probate or other legal process. However, the beneficiary has no rights to the property during the original owner’s lifetime, and the owner remains in complete control of the property.

To learn more about the risks and benefits of joint ownership of real estate and other planning tools, contact The Law Offices of Dana M. Kyle to schedule a consultation.