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Property Co-Ownership and the Risks Involved
Although there are some positives to owning a property with the family such as letting you pass on the asset without going through probate, there are several risks, including taxes, creditor exposure, and loss of control. So when dealing with property, it is important to consider these risks and how to manage them, or to consider other methods of estate management entirely.
The first risk of co-ownership is taxes. When a portion of the property is deeded to someone other than a spouse, it is considered a gift, which can trigger gift or estate taxes. It also means that the property will not be subject to the capital gains exception for inheritance if your family sells the property after your death.
The second risk is creditor claims exposure. More creditors have a claim on the property when more people have ownership. Similarly, the more people own a property, the more have control over it. That means other owners can transfer ownership, and that if you decide to sell, you will have to get their permission. And so on.
If you do decide on joint ownership, careful planning is a must. Decide ahead of time who will be in charge of maintenance and repairs, rent and finances, business management and licenses, property showings, move-in and move-out, et cetera. Also, figure out how you will share expenses; one arrangement is to do so proportionally to your shares in the property. Discuss your short- and long-term goals to figure out what you all want to do with the property. If you plan on renting, regardless of who will manage tenants, it is important to agree on tenant criteria, such as credit score and lease term length.
Joint ownership also means deciding how to take title the property. There are two options, three for married couples. The first is a Tenants in Common agreement; the second is Joint Tenants with Right of Survivorship; the third is an LLC.
A Tenants in Common agreement means that you both own shares of the property and either of you can sell at either time. Under a TIC agreement, if one of you dies, your share passes on to whomever you named in your will. You can modify this in the agreement so that you can buy out your partner before they sell to someone else or after they die. Joint Tenants with Right of Survivorship is similar to a TIC, but typically only for married couples. If one owner dies, that person’s share passes automatically to the other.
Another method of joint ownership is to form a business entity, which would then own the property instead of you and your co-owner. Forming a business entity would separate the property from your personal assets and insulate personal assets from debts accrued from this particular property and the associated business.
An alternative to joint ownership is a living trust. A living trust is set up during your life and it is revocable. You have control and can add and remove assets throughout your life. Upon your death, the trustee (e.g., your spouse) distributes the assets the beneficiaries.
If you have questions or would like to discuss ways to protect the property you own, we would be happy to talk with you. Please contact our Sherwood or Searcy at 501-834-2070; we look forward to hearing from you.
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