This four part series addresses several broad issues encountered by nontraditional couples regarding the acquisition, ownership and transfer of real property. (See NOTE.)
While most married couples own real estate in a form of ownership called “tenants by the entirety,” this form of ownership is not available for nontraditional couples in jurisdictions where they cannot legally marry. As a result, nontraditional couples frequently seek other forms of property ownership that can replicate the benefits of a tenancy by the entirety or achieve other goals of the couple.
Alternative Ways to Hold Real Property
There are two primary alternative ways to title real property for nontraditional couples: (1) joint tenancy with right of survivorship and (2) tenancy in common. It is helpful to understand the unique attributes of each type of ownership to make the best decision for your family about how to own property. A discussion with counsel about your unique circumstances will help determine the best form of property ownership for your family.
Joint Tenancy with Right of Survivorship
The first type of ownership often used by nontraditional couples is a joint tenancy with right of survivorship. Here are some key attributes of this type of ownership:
- Both parties have equal ownership of the property. This is often described as an “undivided 50% interest in the whole,” as there is no dividing line or portion of the property owned by each tenant, but rather the entire property is jointly owned by both tenants equally.
- Unless the parties agree otherwise in a joint tenancy agreement, both joint tenants share in any income or gains, as well as in the duties and obligations of owning the property. For instance, if the property is leased, or sold at a gain, the joint tenants would share the lease income or sales proceeds 50-50. Similarly, obligations like maintenance, taxes, insurance, utilities and other costs are shared 50-50.
- When the first joint tenant dies, full title to the property vests automatically in the surviving joint tenant outside of a will or probate.
- While the vesting of full title in the second tenant to die provides some simplicity and replicates benefits available to traditional couples, it may also complicate estate planning for nontraditional couples. For example, since title to the property vests automatically in the surviving tenant, the first joint tenant to die has no ability to leave a share of the property to an heir. Where the couple has children or other joint heirs, this may not be an issue. But if there are no children or joint heirs, 100% of the property would pass to the heirs of the second member of the couple. The person who dies first would lose the power to direct who would inherit an interest in the property. Nontraditional couples can address this issue by identifying joint heirs when they purchase the property (with the ability to change the designations later) or by agreeing that on the death of the second member of the couple, the property will be sold, with the proceeds split equally between each party’s designated beneficiaries.
- Absent a contractual prohibition, a joint tenancy may be terminated at will by either member of the couple, which converts it to a tenancy in common (discussed below). To alter this result, the parties can enter into a joint tenancy agreement that provides alternative methods for the dissolution of the joint tenancy or transfer of interests in the property.
- A joint tenancy can be challenging in an unpredictable relationship, because either joint tenant can “hold out” and effectively prohibit the sale or encumbrance of the entire property absent their consent. A joint tenancy agreement can also help to address this issue with a buy-sell provision often referred to as “I cut you choose.” This allows one party to name a price for the buyout, and then the other party must choose either to buy the remaining share or sell his/her share at that price.
- Property owned in a joint tenancy may be subject to the claims of both tenants’ creditors.
- Many jurisdictions require that if the property is owned in a joint tenancy it must be noted on the deed.
Tenancy in Common
The second type of property ownership frequently used by nontraditional couples is a tenancy in common.
- In a tenancy in common, each partner owns a specified portion of the property. Unlike a joint tenancy, in which each party owns an undivided 50% interest in the whole, tenants in common may hold property in any proportion (e.g. 80-20 or 65-35).
- Either party may dispose of, convey, or encumber his/her share of the property as he/she wishes, absent a contrary contractual agreement. Tenants in common frequently enter into contracts governing the sales process and restricting the parties’ rights to encumber the property. For example, a tenancy in common agreement often provides each party a right of first offer and/or right of first refusal to purchase the other party’s share before it may be sold to a third party.
- Because there is no right of survivorship, when a tenant in common dies, his/her interest in the property does not automatically pass to the other tenant in common. Rather, it passes under their will (or under the intestacy statutes of the state, should the decedent not have a will at death).
- If there is any ambiguity about the form of ownership in which a property is held, most jurisdictions presume a tenancy in common as the default rule.
Please check back tomorrow to read the second part of this four part series that will address issues and complications that may arise when one partner already owns property.
NOTE: This outline provides a quick review of key issues and is intended for reference only. Additional understanding of a couple’s circumstances and goals would be needed to provide specific advice about any real property transaction. The practical details also may vary by jurisdiction.