Property ownership can be divided in a few different ways, a fact that becomes important as you begin creating an Estate Plan. Learning how different property titles are held can help you choose the correct arrangement for you and your spouse. Property often refers to real estate, but it can also include other valuable assets as well.
The following guide will look at two different ownership methods: joint tenants vs community property with right of survivorship. Each of these arrangements looks slightly different, and property owners may want to better understand the benefits of each situation before making a decision. Keep reading to learn more about joint tenants and community property:
What is joint tenancy?
What is community property?
Difference Between Joint Tenants vs Community Property with Right of Survivorship
Protect Your Property with Trust & Will
What Is Joint Tenancy?
Joint tenancy is a legal arrangement when there are two or more co-owners on a property. Each co-owner in a joint tenancy agreement has an equal stake in ownership and responsibility over said property.
The term is typically used to describe real estate ownership, but joint tenancy agreements can also be reached with personal property, bank accounts, and business ownership. Think about a married couple buying a house together. If they purchase the house as joint tenants, each spouse would have equal access and control of the property.
What Is A Joint Tenancy With Rights Of Survivorship (JTWROS)?
Joint tenancy with rights of survivorship (JTWROS) is one of several ways ownership of an asset can be divided. What is unique about this arrangement is that the right of survivorship dictates how the asset will one day be inherited.
In a JTWROS agreement, co-owners cannot pass their shares to an heir of their choice after death. Instead, the other co-owner(s) would inherit their portion of the property. Looking again at the example of a married couple, after one spouse passes away the other spouse would become the sole owner of the property.
Pros of Joint Tenancy
Joint tenancy is the most common ownership arrangement, likely because of the simplicity of the agreement. Many first-time home buyers use this method when purchasing property with their spouse. Here are some of the other benefits of joint tenancy:
Joint tenancy can make purchasing property more affordable, as both co-owners can contribute to the down payment and mortgage of the house or asset.
All co-owners have equal responsibility to take care of the property.
Co-owners can avoid letting the property pass through probate after the death of an owner. Instead ownership will automatically transfer to the other co-owner(s).
In cases of real estate investments, joint tenancy often incentivizes co-owners to cohesively maintain the property and manage it correctly.
Cons of Joint Tenancy
Joint tenancy is not the only way to co-own a property, making it important to consider the potential cons before opting for this agreement. Here are a few things to consider before choosing a joint tenancy arrangement:
Business partners may want to select an heir for their share of an asset, rather than allowing a partner to automatically inherit their portion.
Couples who choose joint tenancy agreements will need to determine how to divide the property after divorce, which can result in legal battles.
Co-owners are equally responsible for their portion of the mortgage or debt associated with the asset. If one owner fails to contribute financially, the other owner would be forced to make up for the loss or face default.
If the loan of an asset reaches default, both co-owners will be accountable for the debt. Both owners' credit will be affected.
What is Community Property?
Community property is an ownership designation exclusive to married couples. Anything considered community property equally belongs to each spouse, regardless of which spouse acquired the assets, property, or income.
There are specific states that are community property jurisdictions. These are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Community property includes income earned, real estate, personal property, and sometimes individual property that has become “commingled,” meaning it cannot be identified and separated. Generally speaking, gifts, inheritances, and property acquired by one spouse before the marriage are exempt from this consideration.
Each community property state has slightly different regulations in cases of divorce. Prenuptial agreements can also be used to avoid certain aspects of community property ownership.
What is the Meaning of Community Property with Right of Survivorship?
Community property with the right of survivorship is an agreement where, after the death of a spouse, ownership of the property automatically passes to the other spouse. The property or asset therefore avoids probate completely.
What Happens to Community Property When One Spouse Dies?
When one spouse dies, community property designates that the other spouse would gain full ownership of the asset or property. For example if a married couple purchased a house together as community property, the surviving spouse would then have full ownership of the property.
The community property would then avoid a traditional probate process, as ownership would be transferred rather than inherited. The surviving spouse would also qualify for a double step-up in tax basis for the assets. This means that the property would be taxed based on the value at the time of the deceased spouse’s death.
What is the Difference Between Joint Tenants vs Community Property with Right of Survivorship?
The main difference between joint tenants vs community property with right of survivorship lies in how the property is taxed after the death of a spouse. In joint tenant agreements, the proceeds from the sale of a property (after the death of a spouse) would be subject to the capital gains tax.
If the property was held as community property with right of survivorship, and then sold after the death of a spouse, the proceeds from the sale would be exempt from the capital gains tax.
Another difference is that anyone can purchase property as joint tenants, but only married couples can hold community property. Similarly, a joint tenancy agreement can be broken if one owner sells or transfers their share of ownership to another person. Community property agreements typically only end when assets are divided during a divorce.
Protect Your Property with Trust & Will
Despite their differences, joint tenants vs community property with right of survivorship agreements are highly similar. Both agreements allow ownership to be transferred after the death of a spouse, and both allow the asset to avoid the traditional probate process.
As you navigate business partnerships, investments, and even marriage it is important to consider the various ownership designations. If you are interested in learning more about how to protect your assets, reach out to our team today to get started!
There are several ways to divide ownership of an asset, and at first glance they often sound similar. When considering joint tenants vs community property with right of survivorship agreements, it's important to take a closer look at the future tax impact. While both arrangements have benefits during the probate process, there are some differences to consider. Whether you are buying property with a business partner or a spouse, it's important to think about which arrangement is right for you.
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