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Thursday, January 7, 2021

Severing Joint Ownership of Property

One of the most common forms of property ownership in the United States is joint tenancy with rights of survivorship (JTWROS or joint tenancy). But what is joint tenancy? Joint tenancy is a legal right to property that provides the owner an undivided right to the enjoyment of the property. In other words, one joint tenant cannot legally stop the other joint tenant from enjoying use of the entire property. The “WROS” part of JTWROS means that when one joint tenant dies, the deceased joint tenant’s share of the property automatically passes to the other joint tenant without the need for probate or other formal proceedings.

 

This survivorship feature of joint tenancy makes it very attractive to married couples and individuals who want to jointly own property with another person (like an adult child) without additional estate planning documents or sending their joint owner through the time-consuming and costly probate process. Because the joint interest passes by law to the survivor, there is very little that must be done to pass that property to the other joint tenant at death. And who doesn’t like easy?

 

At first impression, this method of ownership is attractive, as it is generally very inexpensive to establish and works in a simple and straightforward way. However, joint tenancy and its potential impacts on estate planning can, in certain circumstances, result in unanticipated and unwelcome legal consequences.

 

It is important to note that there are other forms of joint ownership of property that will not be discussed at length in this article, including tenancy in common, life estates and remainder interests, community property ownership, and tenancy by the entirety.

 

Reasons to Terminate Joint Tenancy

 

Joint tenancy can become undesirable in a number of common situations, including the following:

 

  • ●a divorcing married couple
  • ●one joint tenant wants to sell the property, but the other joint owner is refusing to sell
  • ●a joint tenant changes his or her mind about who should receive that joint tenant’s property interest at death
  • ●a spouse in a second marriage wants to leave his or her joint tenancy interest in the married couple’s home to the children from the first marriage instead of to the spouse
  • ●joint tenants cannot agree on matters of management and upkeep of the property

 

In any of these cases, it may be time to terminate or sever the joint tenancy because the actual outcome of JTWROS is contrary to the joint tenants’ current or future wishes. For example, if a divorcing couple continued to own property as joint tenants, upon the death of one of them, the deceased spouse’s interest in the property would pass to the ex-spouse rather than to the children or to a new spouse.

 

Likewise, if a parent named only one child as a joint tenant on the deed to the family farm or residence but later created a will expressing a wish to have all of the children share equally in the property, the deed would override the will, and the entire interest in the property would pass to the one child who was listed on the deed as a joint tenant. That child would have no legal obligation to follow the terms of the will—not a good result.

 

Methods of Severing Joint Tenancy

 

Gifting. If the joint tenants are on good terms and can agree, the simplest way of severing a joint tenancy is for one of the joint tenants to file a new deed with the county recorder that transfers (or gifts) the property to the other joint tenant. This allows the individual receiving the property through the deed to own the entire interest in the property with no one else having a right of survivorship. Upon the death of the owner, the property will pass according to the terms of the owner’s will and testament, or if none, to the owner’s legal heirs determined by the state intestacy laws.

 

One downside to this method is that federal transfer tax law is likely to treat this conveyance of property as a taxable gift. When someone makes a taxable gift above $15,000 in one year to one individual, federal law requires that person to file a gift tax return that would most likely need to be prepared by an experienced tax professional.

 

Conveyance to a third party. Another option is to convey the joint tenancy interest in the property to a third party (through a gift or through a sale). Doing so will convert the joint tenancy to a tenancy in common, another form of joint ownership.

 

Tenancy in common is similar to joint tenancy in that the tenants have an undivided right to occupy and enjoy the property; however, there are no rights of survivorship between the tenants. Instead, at the first tenant in common’s death, the property interest will either pass according to the deceased owner’s will, or if there was no will, to the deceased’s owner’s family through intestacy laws.

 

In many states, such a conveyance can be made by a joint tenant unilaterally (without the consent of, or even by providing notice to, the other joint tenant). A joint tenant can also convey the joint tenancy interest to himself or herself, which will sever the joint tenancy and create a tenancy in common. Such a conveyance must typically be recorded in the county recorder’s office to be effective, though the law is not always consistent from state to state on the requirements for severing a joint tenancy. It is crucial that state law be consulted before any attempt to sever a joint tenancy to ensure that the applicable legal requirements are met.

 

It is also important to understand that in some states, if there are more than two joint tenants with rights of survivorship, the rule will create a last-person standing situation where the last surviving joint tenant will receive the entire interest in the property. However, in many states, if only one of multiple joint tenants attempts to sever the joint tenancy by conveying that individual’s interest to himself or herself or to a third party to create a tenancy in common, only that individual’s equal interest in the property would be converted into a tenancy in common interest. The remaining joint tenants would continue to own their equal share interests as JTWROS between themselves.

 

Divorce proceedings. In a divorce proceeding where a couple owns property in joint tenancy, the judge will usually sever any property owned in joint tenancy as a part of the divorce decree. Doing so ensures that the parties to the divorce can go their separate ways with their separate property rather than continue to be tied together through joint ownership of what was once marital property. The divorce decree will often require that the appropriate real property documents (deeds) be prepared and filed with the county recorder’s office to officially sever the joint tenancy. In many cases, the attorneys representing the divorcing spouses will assist in preparing and recording such paperwork with the county recorders.

 

Buyouts. Another method for severing a joint tenancy is for one of the joint tenants to simply make an offer to purchase the other joint tenant’s interest in the property. If the joint tenants agree on a purchase price, the seller prepares a deed to convey the real property to the other joint owner. The deed is then recorded, thereby severing the joint tenancy.

 

Judicial partitions. When joint tenancy between nonmarried individuals becomes a source of disagreement or conflict, it may be necessary to seek a judicial partition of the property. This remedy requires one or more of the joint tenants to seek help from a court and ask a judge to divide the property fairly between the joint tenants. This partition can be done in-kind by drawing boundaries through the land and allocating equal portions of the land among the joint tenants. Alternately, if such physical division is impossible due to the nature of the property, the court can order that the land be sold and the proceeds of the sale be divided equally between the parties.

 

Judicial partitions can be costly and time-consuming, and in the case of a forced sale of the property, can trigger recognition of capital gains on the property resulting in unwelcome tax liability for the parties. As a result, reserve judicial partition as a remedy of last resort if at all possible.

 

Don’t Go It Alone

 

In certain circumstances, joint tenancy can be a simple and effective method of jointly owning and transferring property at the death of one of the joint owners. Nevertheless, joint tenancy can also have serious unintended consequences. Many individuals fail to realize that joint tenancy survivorship provisions will nearly always override the provisions of a will or a trust agreement.

 

It is therefore crucial that someone who owns joint tenancy property seek the advice of an estate planning attorney when using joint tenancy as a tool for estate planning. Without careful consideration and planning of your estate, using joint tenancy improperly could unintentionally set your loved ones up for significant misunderstanding and legal expense. If you have any questions about your real property and how it relates to your estate planning, please give us a call. We are available for in-person or virtual consultations, whichever you prefer.



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