Joint tenancy can make the financial side of real estate ownership easier initially, but it comes with the risk of restricted property control and unequal contributions. It can also result in unintended disinheritance, unwanted debt exposure, and forced liquidation.
Recognizing such risks has become even more crucial nowadays, as joint ownerships are on the rise. Data from CoBuy states that in the U.S., 31.5% of home purchases involve co-buyers. About 64 million Americans co-own a residential property with someone who isn't their spouse.
What Does Joint Tenancy Mean?
The term "joint tenancy" refers to a legal arrangement in which two or more people share an "undivided interest" on a property or asset (e.g., a home or commercial building).
Undivided interest in joint tenancies means equal ownership. If there are two joint tenants, they own "50-50," or an equal, undivided percentage of the property.
Many people agree to joint tenancies because of their "right of survivorship" feature. It's a legal principle that aims to simplify the process of transferring the percentage owned by a joint tenant who passes away.
With the right of survivorship, a deceased tenant's portion automatically transfers to the surviving tenant(s) without having to go through probate.
Most people don't want to go through probate, as it takes many months and can be very expensive. USA Today cites data stating that the average probate lasts around 20 months. It also costs thousands of dollars, ranging from 3% to 7% of the estate's value.
What Are the Disadvantages and Risks of Joint Tenancy Ownership?
Joint tenancy is common and, in many cases, the preferred agreement of married couples, as its right of survivorship feature makes it practical. It can, however, pose the following challenges and risks, particularly for those entering the arrangement with people other than a spouse.
Restricted Property Control
The right of survivorship in joint tenancy agreements overrides wills. It dictates who gets the property if one of the co-tenants dies.
If you enter this type of real estate ownership, you can't specify the heirs you want to leave your percentage of the property to. The other co-tenant automatically gets that right.
Unequal Financial Contributions
Another challenge and risk of joint tenancy is that, by law, all co-tenants hold equal shares, even if their financial contributions aren't equal.
Suppose Jane and Jill are business partners, and they're buying a commercial building for their operations. Jane covers 75% of the property's purchase price, while Jill pays for the rest (25%). Under joint tenancy, Jane and Jill are still equal owners, which means they each own 50% of the property.
The problem is if the business relationship ends in an unamicable way. In this case, Jane may be unable to recover her entire investment if Jill decides to hold on to her 50% legal share, even though her actual financial share was only 25%.
Unintended Disinheritance
Parents can decide to enter into a joint tenancy agreement with one of their children, such as if they need help managing their estate. It may be convenient for estate management, but it unintentionally disinherits the other children if the estate-owning parent dies.
Unwanted Debt Exposure and Forced Liquidation
Let's say one of the joint tenants finds themselves at the brink of bankruptcy or is facing a divorce, lawsuit, or extreme debt. Their creditors (the parties that the in-debt co-tenant owes money to) can then attempt to seize or place a lien on the jointly owned property.
The other owner(s) who had nothing to do with the debt will then get involved, albeit involuntarily. They may even face attempts from creditors forcing the sale of the property to collect on the other joint tenant's debts.
Can You Get Out of a Joint Tenancy?
Yes, you can get out of a joint tenancy by severing the legal arrangement. The exact process varies from one state to another, though; if you or the joint property is in California, for instance, you can find a more detailed guide and learn more at Underwood Law.
In many cases, however, it's possible to perform a "unilateral" severance of the agreement, which means you can sever the joint tenancy without the other co-tenants' consent. You can legally transfer your share of the property to yourself (or a third party), such as through a quitclaim deed.
Frequently Asked Questions
How Does a Quitclaim Deed for Severing Joint Tenancies Work?
A quitclaim deed is a legal document you can use to transfer your interest in a piece of real estate property to yourself or another party. In a joint tenancy, this deed destroys the "right of survivorship." It converts the ownership agreement into a tenancy in common.
Do You Need a Lawyer to Create and File a Quitclaim Deed?
No.
There's no law requiring co-tenants to hire a lawyer for severing joint tenancies through quitclaim deeds. You should still consider hiring one, though, as there are many steps involved, and making a mistake can lead to issues like tax liabilities and unclear ownership.
How Do You File a Quitclaim Deed?
If you decide to create and file a quitclaim deed yourself, the first step is to find the original and current deed of the property to retrieve the property's exact legal description.
Then, identify all the parties involved. As the person transferring the interest, you'll be the "Grantor." The new owner, which could be you or another party, will be the "Grantee."
Next, draft the quitclaim deed. It must include the full legal names and mailing addresses of the Grantor and Grantee. You must also use vesting language, a clear statement declaring the transfer of the interest.
Sign the document in the physical presence of a notary public, and then have it notarized. Finally, have your County Clerk's Office or Register of Deeds record the deed.
Always Consider the Risks of Joint Tenancy
While joint tenancy could be a good option (e.g., for married couples and business partnerships), it's not for everyone, as it poses challenges and risks. It could lead to restricted property control, unequal contributions, or even unintentional disinheritance.
Anyone thinking of entering into such an agreement should therefore consider all those risks thoroughly.
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