Joint Tenancy: The most common form of ownership when there are two or more owners. With real estate, the deed specifies “joint tenants”. Joint tenants each own the same interest in the property. Each has a right of survivorship; if there are two owners and one passes away, the other becomes the sole owner. Jointly owned property is not conveyed by a Will if any joint tenant is still living. Household items purchased by couples are jointly owned, as are bank accounts, cars and other property listing both people on the title.
Each joint tenant is liable for the entire property and must agree on any decisions regarding the property. Jointly owned property is subject to the creditors and liabilities of each joint tenant; forced sales are possible. Aging, single parents sometimes add an adult child as a joint tenant for MaineCare, asset management or estate planning purposes. Such transfers can have unintended results: mortgages require the consent of both owners, the property could be claimed by the child’s creditors or in a divorce, or the child could assert rights of ownership unforeseen by the parent. For wealthier individuals, adding a child as a joint tenant creates a taxable gift and does not remove the property from the parent’s estate for tax purposes.
For couples* with more than $1 million in assets, jointly owned property may present a problem because succession is not governed by a Will or Trust so that the property cannot be shielded in tax shelter trusts. For couples without estate tax issues, joint tenancies allow property to pass to a surviving spouses outside of probate, which either decreases probate fees (which are based on the value of Will- transferred assets) or makes filing probate unnecessary (if all assets are jointly owned.) If a couple owns all of their property jointly, a surviving spouse will take sole ownership of all the couple’s property. Thereafter, however, the surviving spouse would want to execute a Will to provide for the later distribution of the property. A Will also would be prudent, even if all property is joint, to provide for the distribution of property should the couple die simultaneously or within a short time of each other.
Tenancy in Common: Each tenant in common owns a separate interest of the property. Thus, two equal tenants in common each own a half interest, etc. Tenants in common convey property by Will as they do not have rights of survivorship. Tenancy in common is used for estate tax planning to enable each owner to transfer their interest into tax shelter trusts. Tenants in common only own a share of the property so their creditors are only able to reach part of the property. Each tenant, however, can mortgage or even sell their interest without the agreement of the other owner(s).
* Same sex couples face additional estate planning complications because they are not eligible for marital tax deductions.
In addition to joint tenancy and tenancy in common, discussed previously, here are a few other forms of property ownership and their consequences:
Sole Ownership: Property with only one owner. Solely owned property is transferred by Will, or by the laws of intestacy if someone passes away without a will. Used mostly for single people or a surviving spouse, sole ownership is also useful when one member of a couple has a high liability job, such as a doctor, to put property in the other spouse’s name. Ownership by one spouse protects the property from the other spouse’s creditors. Such transfers also must be made in advance of any actual liability or they will be deemed fraudulent and disregarded.
Limited Liability Company [LLC]: LLCs offer the asset protection of corporations but the taxation treatment of partnership, and as such are a wise choice for investment or rental properties. If someone is injured on LLC property, the owner’s personal assets are not at risk (unless they engaged in fraud or misrepresentation). But LLCs are not corporations and do not require officers or annual meetings. LLCs are “pass-through” entities, which means that their earnings can be reported on individual tax returns, but they continue to belong to the LLC members and so do not avoid estate taxation. Once property is owned by an LLC, ownership can be transferred without recording and so kept private. There are legal costs to setting up an LLC, as well as an annual filing requirement and fee.
Inter Vivos Trust: Also known as a living trust because the creator of the trust is alive. The trust creator often serves as the trustee and retains interest in the property. These trusts provide privacy and can offer ease of asset management; they also avoid probate. Probate avoidance, however, is not a big issue in Maine where probate is relatively affordable and efficient. Inter vivos trusts can be changed or revoked while the creator of the trust is alive and can be written so as to distribute property outright upon the creator’s death, or to continue under whatever terms the creator determines. These trusts can be used for estate tax avoidance by transferring property to others while the creator of the trust retains some limited interest. Inter vivos trusts are not overseen by the court, unlike testamentary trusts. Trusts, however, can be expensive to form and can make property more difficult to sell or refinance.
Testamentary Trust: A trust formed by a will. These trusts do not avoid probate, but can be used to avoid estate taxation when created for a surviving spouse. Both testamentary and inter vivos trusts are private agreements and can vary widely, lasting for months or generations. Trusts can include provisions that protect beneficiaries’ interests in the trust from creditors, that set the terms of how trust property should be managed, and that allow future generations to continue or sell their interests in the trust. As such, trusts some times can limit future beneficiaries in ways that the trust creator had not foreseen, and so need to be considered carefully.
By Maryellen Sullivan. This article is not intended to be legal advice, which depends greatly on the specifics of any situation.