Joint Ownership of Real Estate and the Law of Unintended Consequences

Joint ownership of real estate is often a substitute for or a result of estate planning.  Typically, people either create joint tenancies during their lives with children and other heirs as a means to pass title to the real estate without the necessity of a will; or they create joint tenancies by giving a blanket gift to a class of beneficiaries.  For example, “I give all of my property in equal shares to my children,” when used in a will creates a joint tenancy among the children in all of the deceased parent’s property.  Unfortunately, joint ownership often has unintended, unexpected and undesirable consequences in either context.

For purposes of this discussion, I will be dealing only with joint tenancies with individuals other than a spouse.  A joint tenancy between husband and wife is called a tenancy by the entirety and it has certain characteristics and benefits not available to other joint tenancies.

Joint Tenancies Created with Others During Life

There are several potential problems that may arise when you create joint tenancies with others:

  1. You lose control of the property. Generally, in order to sell or refinance jointly owned property, you must have the consent of all of the owners.  When you give away a joint interest in property, you give away the ability to sell or refinance the property without the consent of others.  A joint tenant may simply disagree, or he or she may become incapacitated and unable to agree.  In that case, a guardian or conservator would have to be appointed and he or she may determine that selling or refinancing is not in the joint tenant’s best interest.

It gets better.  Joint tenants each own an undivided interest in the whole property, not a designated portion of the property.  Recognizing joint tenants may not always agree on how to use the property, the law grants joint tenants a right of partition, meaning they can have the property physically divided into shares or, if that is not practical, say in the case of a house or building, they can have the property sold and the proceeds of the sale divided according to each joint tenants respective interest.

We are not done, yet.  A joint tenant may sell his or her undivided interest in your property (now, their property, too) to an unrelated third party who will also have the right to partition the property.

  1. Their creditor problems become yours. If a creditor has a judgment against a joint tenant, the creditor can execute upon and attach the joint tenant’s interest in the property and force the division or sale of the property through a partition proceeding in order to satisfy the judgment against the joint tenant.
  2. You might trigger unnecessary capital gains taxes. If you create a joint interest in real estate as a way to pass the property to your heirs, you may create unnecessary capital gains taxes for them.  Currently, the first $11,000,000 in property is exempted from the federal gift and estate tax.  North Carolina abolished its gift and estate taxes.  Most individuals will, therefore, not pay any gift or estate tax regardless of when they give their property to their heirs.  However, the timing of the gift could make a big difference on how much capital gains tax your heirs pay.

When you give property away during life, the recipient of the gift also receives your cost basis in the gift for purposes of calculating his or her capital gain on sale.  When you give property away at death, the cost basis is adjusted (usually upward) to the fair market value at the date of death.  Giving away property during life usually results in heirs paying more in capital gains taxes than receiving the property at death.

Joint Tenancies Created at Death

Joint tenancies are created at death through the language in a will or by the default statutory rules in effect when one dies without a will the Intestate Succession Act.  Whether by will or by intestacy, joint tenancies created at death, with the exception of increased capital gains, have all of the same problems as joint tenancies created during life, plus a few more unexpected wrinkles.

  1. Gifts to Minors. If you give all of your property to your children and one or more is still a minor, your heirs will incur a great deal of difficulty and expense in attempting any sale of the property.  The minor cannot consent to the sale, so a guardian must be appointed to represent the minor’s interests with respect to the property.  Further, a guardian cannot consent to the sale of the minor’s interest in real property without court approval, thus requiring two separate court proceedings to appoint the guardian and approve the sale.  If there are multiple properties, the guardian, once appointed will have to petition the court each time a piece of property is sold.
  2. Gifts to Charities. Giving a fraction or a percentage of your estate to your church or another worthy cause is a wonderful, noble gesture.  However, if not done properly, such gifts may result in the creation of a joint tenancy among your individual heirs and the charity.  In order to sell the property, your heirs will need the consent of the charity.  Most charities are organized as nonprofit corporations.  Corporations act through their officers and directors, meaning your heirs will have to contact the officers of the corporation who then must present the terms of any offer or sale to the directors of the corporation for a vote on whether to approve or disapprove the sale.  As with minor joint tenants, charitable joint tenants usually mean more time and more expense.

So what can you do? These decisions are too important and complex to be left to chance. Consult a law firm that specializes in estate planning. A good lawyer will help you decide the best way to manage your property to meet your needs and goals during life and how to best structure your estate to comply with your wishes and reduce the costs and expenses to your heirs at your death.  Please call or email me to discuss your goals and how best to achieve them.

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