WRITTEN BY JOHN REILLY
Inspections, financing, escrow, tons of paperwork, have finally culminated in the preparation of the deed conveying title to the buyers. Now the big question for the buyer: “How best to hold title to the new home? Should we hold title as joint tenants, tenants in common, tenants by the entirety, or some other form of ownership?”
In the following series of articles, let’s begin to explore some of the different choices available to multiple owners with some highlights from The Language of Real Estate by John Reilly, Dearborn Publishing (Amazon).
An estate or unit of interest in real estate that is owned by two or more natural persons with rights of survivorship. Only one title exists, and it is vested in a unit made up of two or more persons, all owning equal shares. The basic idea of a joint tenancy is unity of ownership; the title is held as though all owners collectively constituted one person, a fictitious entity.
The death of one joint tenant does not destroy the owning unit—it only reduces by one the number of persons who jointly own the unit. The remaining joint tenants receive the deceased tenant’s interest by the right of survivorship. Thus, the decedent’s interest cannot be transferred by will or descent. As each successive joint tenant dies, the remaining tenants acquire the interest of the deceased. The last survivor takes the title in severalty, fully inheritable at his or her death by heirs and devisees.
Some form of joint tenancy is recognized in most states, although several states have opted to eliminate the right of survivorship as a distinguishing characteristic. The fact that one holds title to the property as a joint tenant is no reason for a person not to make a will. Joint tenancy does avoid a formal probate proceeding, however.
The Four Unities
Traditionally, four unities are required to create a joint tenancy: the unity of title, the unity of time, unity of interest and unity of possession. Unless all four unities are present, no joint tenancy is created. Such unities are present when the title is acquired by one deed, executed and delivered at one time and conveys equal interests to all the grantees, who hold undivided possession of the property as joint tenants.
A joint tenancy can be created only by grant or purchase (by a deed of conveyance) or by devise (will)—it cannot be created by operation of law. The grantees or devisees must be specifically named as joint tenants. In most states, a deed or will that is unspecific about the grantees’ or devisees’ tenancy will pass title to the parties as tenants in common. The typical wording used to create a joint tenancy may be “To Morton Charles and Seymour Berkowitz, and to the survivor of them, and his or her heirs and assigns as joint tenants, with rights of survivorship, and not as tenants in common.”
Note that a combination of interests can exist in one parcel of real estate. For example, if Jack and Betty Redundo hold title to an undivided one-half as joint tenants, and Irving and Bernice Proszek hold title to the other undivided half as tenants by the entirety, the relation between the two sets of joint tenants is that of a tenancy in common.
A joint tenancy can be terminated when any of the essential unities referred to above have been terminated. This can occur either by agreement of the parties or by one of the parties selling his or her interest in the joint tenancy. For example, if Bob Burns, Bob Smith, and Bob Roberts hold title to certain farmland as joint tenants, and Roberts conveys his interest to Rebecca Sunnybrook, then Sunnybrook will own an undivided one-third interest, and Smith and Burns will continue to own an undivided two-thirds interest as joint tenants.
Rebecca Sunnybrook will own the farm as a tenant in common with the joint tenants Smith and Roberts. The same destruction occurs if one or more of the joint tenants’ interests are defeated by an action of law, such as the appointment of a receiver in bankruptcy or the sale of the property to satisfy a judgment. In title-theory states, a mortgage is a conveyance of land to the lender. The land is then subject to being reconveyed upon payment of the debt, and a joint tenant in such states who mortgages his or her interest without the other joint tenants joining the mortgage will, therefore, destroy the existing joint tenancy by removing his or her interest from the joint tenancy.
No Dower in Joint Tenancy
Many state laws hold that there is no dower in joint tenancy. Thus, business associates can hold title to a parcel of real estate as joint tenants, and any spouses are not required to join in a conveyance to waive dower and/or homestead rights. A corporation cannot be a joint tenant because it has perpetual existence and—at least in legal theory—never dies.
A common misconception is that a debtor can protect himself or herself from creditors’ claims by taking title to the property in joint tenancy. The creditor has every right to attach the debtor’s interest in the jointly held property and force a partition. However, if the joint tenant dies before the creditor seizes that tenant’s interest, the creditor loses his or her interest because the surviving tenant takes the property free from the claims of the decedent’s creditors. On the other hand, a creditor of the surviving joint tenant has substantially increased his or her security.
One principal advantage of joint tenancy is the avoidance of the delay and expense of probate proceedings because the surviving joint tenant immediately becomes the sole owner of the property. Thus, the current value of the property is not included in the total value of the estate on which probate fees are assessed. Also, the survivor holds the property free from the debts of the deceased joint tenant and heirs against his or her interest. However, the savings in probate fees are partly offset by the legal costs of terminating the joint tenancy of record and may be offset by the added taxes.
Typically, the probate delay is not unreasonably long. However, probate proceedings may sometimes be necessary to cover the furnishings and personal property of the deceased because such property is not usually held in joint tenancy. In addition, each joint tenant gives up the right to dispose of his or her interest by will and, as a result, precludes the use by an estate planner of various tax-saving devices to minimize the estate taxes. These estate taxes can be substantial, in that the value of the jointly held property is included in the decedent’s estate for estate tax purposes even though it does not pass through probate proceedings.
In fact, the federal estate tax may be applied to the entire value of all jointly held property—not just the original cost per owner—except to the extent that the surviving joint tenant can provide detailed records proving the extent of his or her contribution. That contribution must be demonstrated in money, earnings or inheritance, but not in time spent working on the property. There are exclusions, however, such as the rule that each spouse is considered to own one-half of jointly owned property, regardless of which spouse furnished the original consideration or whether the creation of the joint interest constituted a gift.
Remember Gift Taxes
Joint tenancies are subject to gift taxes, income taxes, and inheritance taxes in addition to federal estate taxes. A purchaser should discuss these tax consequences with experienced tax counsel before deciding whether to hold title to the property in joint tenancy. Also, joint tenancy or tenancy by the entirety may not be appropriate for people with children from a prior marriage.
In many states, a property owner can create a joint tenancy (also a tenancy by the entirety with a spouse) by conveying to himself or herself and another as joint tenants without the necessity of conveying through a third person (called a straw man). This is a statutory exception to the common-law “four unities” rule that requires the creation of a joint tenancy by the same instrument when title to the property is acquired.
Another approach would be to Able, Baker and Charley to convey to Baker, Charley, and Daniel as joint tenants.
If all joint tenants die in a common disaster, the Uniform Simultaneous Death Act in effect will treat them as equal tenants in common. Rather than avoid probate, however, the unfortunate effect would be to multiply the number of probate proceedings.
Upon the death of a joint tenant, the survivor(s) should, as a matter of good title practice, record an affidavit of death and a death certificate with the county recorder. This is often required under state inheritance tax laws to obtain tax clearance. If the property is registered in Torrens, the certificate of title must be amended to reflect such death.