Property Co-Ownership Can Be Risky
April 26th, 2021
Too often, people try to circumvent probate challenges by deeding property away to someone else during their lives or by putting someone else on the deed to their home. Also too often, doing this leads to unintended consequences and higher attorneys' fees when unraveling deeds that were poorly executed or that were completed without an understanding of the pitfalls and risks of co-ownership.
Risks of Co-Ownership
Several risks in joint ownership, including taxes, creditor exposure, and loss of control should impact your decision to own property jointly with another. When dealing with property, it is important to consider these risks and how to manage them or to consider other methods of estate management entirely.
The first risk of co-ownership is taxes. When a portion of the property is deeded to someone other than a spouse, it is considered a gift, which can trigger gift taxes or the need for a gift tax return. This, in turn, can also affect future estate taxes (for large estates). It also means that the property will not be subject to the capital gains exception for inheritance if your family sells the property after your death.
The second risk is exposure to creditor claims. For each owner of a property, each of their creditors could have a claim on the property. Thus, the more people who have an ownership interest, the more creditors that could have a claim on the property. Similarly, the larger number of people who own a single property, the more who then have the ability to change who has ownership. For example, sometimes other owners can transfer their ownership, leaving you owning property with someone you do not know. Also, though, if you decide to sell, you might have to get other owners' permission.
When more than one person owns property, decisions about who is in charge of that property are essential. Decide ahead of time who will be in charge of maintenance and repairs, rent and finances, business management and licenses, property showings, move-in and move-out, et cetera. Also, figure out how you will share expenses. One arrangement is to do so proportionally to your shares in the property. Another option is to divide based on who is using the property. Discuss your short- and long-term goals to figure out what you want to do with the property. If you plan on renting, regardless of who will manage tenants, it is important to agree on tenant criteria, such as credit score and lease term length.
Types of Co-Ownership
Joint ownership also means deciding how to take title the property. Available options depend on the state where you live. There are two options common in most states regarding to how title on the deed is stated: owning property as tenants in common or as joint tenants with a right of survivorship. Persons might also own property together through respective membership interests in an LLC or other business entities. And in some states, such as Florida (but not Texas), spouses may own property as tenancy by the entirety.
Owning property as tenants in common (TIC) means that each owner owns a share of the property and any owner can sell at any time. Under a TIC agreement, if one of you dies, your share passes on to whomever you named in your will or by the intestacy laws of your state if you have no will. Joint tenants with right of survivorship is similar to a TIC, but on an owner’s death, that share automatically passes to the other owners. Finally, in states that allow tenancy by the entirety, spouses may own the property together; on the death of one spouse, the property automatically passes to the other spouse.
Another method of joint ownership is to form a business entity, which would then own the property instead of you and your co-owner. Forming a business entity would separate the property from your personal assets and possibly – depending on how the business is structured -- insulate personal assets from debts accrued from this particular property and the associated business. Properly drafted business documents and agreements would determine what happens to the business and any property it owns on the death of an owner of the business.
Better Approaches to Co-Ownership
Revocable Living Trust
An alternative to joint ownership is a living trust. A living trust is set up during your life and it is revocable. You have control and can add and remove assets throughout your life. Upon your death, the trustee (e.g., your spouse) distributes the assets the beneficiaries. This means too that the real property passes according to the terms of the trust without the need (or oversight) of involving the probate court.
Ladybird Deed / Transfer on Death Deed
A lady bird deed is an enhanced life estate deed that allows you to gift your property to someone now but retain full rights for the rest of your lifetime. Very few states allow these, but Texas and Florida do. Some risks and complications can arise with these deeds, so work with an attorney to determine if this is the right course for you.
Texas has a transfer on death deed as an option. This is addressed under Texas statutes and can be a powerful tool for your estate plan. However, like the ladybird deed, risks exist and circumstances might make this less than ideal for your plan. Work with an attorney to better understand what is best for your situation.
If you have questions or would like to discuss ways to protect the property you own, I would be happy to talk with you. Please contact McCreary Law Office or call the Jacksonville, FL office at 904-425-9046 or the Houston, TX office at 713-568-8600.