It is helpful to know the most common types of ways you can own property directly with other individuals. Co-ownership can affect asset protection, estate planning, and the ability to sell, transfer, or otherwise possess and enjoy the property.
The property involved may be real (i.e., a residence), or personal (i.e., an automobile or bank account). In the case of a financial account, the property is personal and also intangible (no physical qualities) .
We’re talking about direct ownership here. As such, properties owned with others via a trust or through business entities such as partnerships or corporations will not be discussed.
Tenancy in Common
This is the default type of co-ownership when individuals own property together and another co-ownership type is not specified. Under a tenancy in common (TIC), the co-owners may have equal or unequal shares.
However, each owner has the same undivided interest which provides the right to possess the entire property regardless of ownership interest percentage. With a financial account, this means that one owner may withdraw all the funds without permission from the other co-owners.
Each owner under a TIC can also sell or otherwise transfer his or her ownership share. Permission from the other co-owners is not needed. Under a TIC, a co-owner also has the right of partition, unless that right was waived in an agreement. As such, a co-owner can demand that the property be split up. This means it can be split up physically, or sold and the proceeds divided. If the co-owners cannot agree on a partition, a partition action can be brought to court.
When two or more individuals own property as tenants in common, there is no right of survivorship. As such, property passes to the decedent’s estate when one of the co-owners dies. It does not directly pass to the other common owners as is the case with a JTWROS or tenancy by the entirety (see below). This means that each co-tenant can control who will inherit his or her interest in the property via a last will and testament, for example.
Whoever inherits the deceased co-owner’s share will become a tenant in common with the other remaining co-owners.
TIC ownership does not offer any asset protection. A debtor of one of the co-owners can go after the ownership interest of that individual. This may ultimately result in a forced sale of tangible property.
Under a joint tenancy ownership, each co-owner has an equal ownership interest in the property. And similar to a TIC, each owner has an undivided interest which grants the right of possession over the entire property.
Under a joint tenancy, each joint tenant has the right to sell or otherwise transfer ownership of his or her interest in the property. Permission is not needed from the other joint owner(s). If this happens, however, the joint tenancy terminates. A tenancy in common would then exist between the old owner(s) and the new owner. A new joint tenancy can be created to include the new owner with a new written agreement.
As with a TIC, joint tenants also have the right of partition.
Two or more Individuals who own property as joint tenants have the right of survivorship. This means that if one of the joint owners dies, that decedent’s ownership share automatically passes to the remaining joint owners. You will often see this type of ownership indicated on statements and documents as (JTWROS). Since property owned as JTWROS does not pass to your estate, it is not affected by any directions you state in your will.
With regard to asset protection, similar to TIC, creditors of a joint tenant can reach that individual’s interest in the jointly owned property.
Tenancy by the Entirety
This is a type of property ownership recognized only by certain states. About half the states in the U.S. allow some form of tenancy by the entirety. State laws change from time to time, so make sure to check with your state for the most up to date information.
Only individuals married to each other can own property under tenancy by the entirety (TBE or T by E). Unless agreed upon otherwise, it can be the default type of co-ownership among husband and wife in states which recognize TBE.
Upon divorce, the ownership type would default to a tenancy in common. Similar to a joint tenancy, those who own property under a tenancy by the entirety have a right of survivorship.
However, unlike with a joint tenancy, each owner under a tenancy by the entirety cannot sell or transfer his or her interest in the property without the consent of the other owner.
Compared to the other co-ownership types discussed here, tenancy by the entirety also offers you the greatest protection against creditors. The husband and wife are seen as one unit. So a creditor of only one spouse cannot go after any of the TBE assets. Only a creditor of both spouses can go after TBE property.
However, TBE ownership alone should not be used as the only form of asset protection. For one, a couple may be jointly liable on a particular debt. Further, divorce or death, for example, can terminate the TBE and leave property unprotected. Judicial interpretation of the validity or intent to own property as TBE can also present a risk. For example, an application or other document may have been filled out incorrectly.
The states which recognize community property ownership are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A few other sates such as Alaska also recognize community property but only by agreement or by creating a trust.
Similar to TBE, this type of ownership is only available to married couples in the states indicated above. Another similarity to TBE is that each spouse’s property cannot be sold or transferred without the consent of the other spouse.
This type of ownership is based on the belief that husband and wife own assets acquired during the marriage. As such, each spouse is deemed to own one half of all such assets unless an agreement is made to the contrary.
Assets acquired before or after marriage or by gift or inheritance are not community property. However, assets that are commingled with community property may also fall under this ownership type.
Most of the states above also allow a right of survivorship option. Community property in Texas, Louisiana, and New Mexico generally does do not have this feature. Make sure to check with your state for the most up to date laws.
Upon divorce, each spouse is entitled to one half of the community property.
With community property, creditors can go after the assets of the non-debtor spouse as well. As such, community property ownership provides the least protection in this regard. So it may be worth it to change ownership of such property to joint tenancy, or to the spouse with the least exposure (fewer debts, non-business owner, etc.). However, this can also undo the intent of the community property laws in the case of a divorce.
Always carefully consider how you own property with others. Each type of co-ownership can affect you in different ways. Do you trust the individual(s) with which you co-own the property? Do they own a business, participate in other financially risky ventures, or carry a lot of debt currently?
Further, co-owners will generally have the ability to possess and enjoy the entire property regardless of their ownership interest. They may even be able to sell, transfer or demand partition without the others’ consent under certain co-ownership types.
Finally, the right or survivorship can affect your estate plans. It will avoid probate, but also overrides your last will and testament.
So make sure you understand the consequences of each co-ownership option and make the choice that is best for you.