2005-03-10 / Business & Finance

Managing Jointly-Held Property

In our country, the amount of jointly owned property probably runs neck and neck with that which is owned individually. It’s hard to tell which ranks first because there are no reliable statistics. Still, to see why this form of ownership is so popular, let’s look at the types available and some of the characteristics of each.

The first, and probably most common, is Joint Tenancy with Right of Survivorship, or JTWROS. With this type of ownership, two people own an undivided fractional interest in a property. When one joint tenant dies, his or her interest is passed to the surviving tenant, who now owns all of the property. A common example of this would be a joint bank account held by two individuals; when party A dies, party B becomes the owner.

Another example of this type of ownership is a bank or brokerage ac-count owned jointly by grandpa or grandma and a grandchild. The grandchild’s social security number is put on the account so that the gains (and considering the last three years in the stock market—the losses) are taxed at the grandchild’s lesser income tax rate.

Another type of joint ownership is Tenancy in Common, in which two or more people own a fractional interest in a property. At the death of an owner, his or her portion of the property passes not to the other joint owners, but to the decedent’s heirs. This type of own-ership would be appropriate when you have unrelated owners of a piece of real estate or business who chose not to incorporate (which has its own set of rules).

A possible problem here is that unknown or unwanted co-owners (the deceased’s heirs) will come into ownership of the property or business at the death of the first owner. The way to avoid this problem is to have a buy/sell agreement in place specifying a price for the deceased owner’s share of the business. The business pays this price to the estate of the decedent ill exchange for the deceased’s share of the business. As most businesses can’t afford to write a co-owner’s share out of the business checkbook, life insurance is often used to fund a buy/sell agreement.

Tenancy in Partnership is ownership imposed by law as part of the partner’s relationship. At the death of a partner, his interest in the business passes to his heirs, not the surviving partners, yet the partnership retains the physical assets. The drawback here is the same as in Tenancy in Common and the solution is also the same, i.e. an insured buy/sell agreement.

The last type of joint ownership is Tenancy by the Entirety. This is available only to married individuals. At the death of a spouse, jointly held pro-perty passes to the survivor. When an asset is owned this way it provides some protection to a spouse, as the other spouse cannot dispose of the property at his or her whim. It must, however, be created by design, as it does not automatically occur.

Jointly held property does not travel by will and therefore is not probated. This is not always an advantage. If you have an estate in excess of $ 1,000,000 owned between spouses, prudent plan-ning might call for part of the estate, at the first death, to go into a trust or to a relative instead of directly to the surviving spouse. This allows for the maximum use of the $1 million exclusion. You can have the most intricate of wills, with all kinds of codicils and trusts, but if all the property is jointly owned, the will is useless because the assets go automatically to survivors, regardless of will provisions.

To correct this problem, ownership of property is usually transferred from Tenancy by Entirety, to Individual Ownership or as Tenants in Common. Yes, spouses can own property as Ten-ants in Common just as non-related persons can.

When spouses own property as Tenants in Common, at the first death, 1/2 of the property (assuming they each own 50%) goes to the surviving spouse; the other half goes according to decedent’s will. This will allow assets to go to a trust or to another relative, thereby completing the estate plan.

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