When property is owned outright by more than one person, those persons were historically thought of as owning the rights or "tenancies" in the property in some form of co-ownership. There are really two types of co-owned tenancies: Joint tenancies and co-tenancies. Some states also recognize "Tenancies by the Entirety", between a husband and a wife, but this is really a form of joint tenancy that applies only to married persons. So why does it matter? In my experience as an attorney, I have seem more problems and broken expectations caused by people failing to understand the difference between these two terms or accidentally using the wrong term than almost anything else. The fix is often expensive and the damages sometimes not repairable.
When two or more people own property as joint tenants, they each co-own the whole property. Each has the right to use the whole of the property and each is jointly and individually responsible for the obligations relative to the property. However, at death, something interesting happens, the rights of the joint tenant who died cease and the remaining owner or owners now own the property in equal shares. The property interest of the deceased joint tenant is sort-of "absorbed" by the other tenants and goes away.
Here is an example where this can cause some dashed expectations:
Peter and John are high school friends that purchased some hunting land and a cabin 40 years ago. When they purchased the property, the deed from the seller listed them as joint tenants, because they nodded their heads when the closer asked if they were going to own the property jointly. For the last 40 years, Peter and John and their sons have hunted the land together and build many great memories at the cabin. John and Peter just each paid $25,000 to put a new roof on the cabin, redo the kitchen and replace the mechanicals so that their children can continue to enjoy the experience after they are gone. John wrote in his will that his share of the hunting property should go to his sons Mark and Anthony upon his death. Peter did the same thing with respect to his son Brian.
One fall day, John died unexpectedly of a heart attack. When mark and Anthony went to the family lawyer to settle the estate they got a nasty surprise. It seems that the language in John’s will about his share of the hunting property going to them has no effect. Because the property was owned by Peter and John as joint tenants, Peter, the surviving joint tenant automatically "inherited" John’s share of the property when John died. It does not matter what Johns will says because John no longer owns anything to pass on. His share evaporated and was absorbed by Peter automatically. The only thing Peter needs to do is file some paperwork at the County recorder’s office showing that John is dead and John’s name is cleared from the title to the property.
Do you think that there are some surprised looks at that meeting? Can it be fixed? Sure. Is it easy? Not always. Hopefully Peter is willing to try to make things right, but he does not have to. Any court in the country would uphold his right to the property and for him to exclude John’s children from what is now 100% his. Peter’s reaction might be to agree to give Mark and Anthony a 50% share in the property. However, the IRS would probably argue that this is a taxable gift forcing Peter to perhaps file a gift tax return and use up some of his gift/estate tax credit. Boy, that knee jerk decision 40 years ago sure made things complicated.
What John and Peter really wanted to do is own the property as tenants in common. Tenants in Common also co-own the entire property; however, their shares in the property can be separated and severed from each other because each has a separate 50% right to the whole as opposed to a shared, joint, 100% right. When a co-tenant in property dies, his share of the property becomes part of his estate and passes according to his Will. This is what Peter and John should have had. If they had been tenants in common, instead of joint tenants, when john died, his 50% share in the hunting property would have gone through probate and passed according to his will to Mark and Anthony, which would have each owned separate 25% shares then.
Typically, the law provides that the default rule is co-tenancy unless you specifically say "joint tenants" in the deed or other transfer document. Similarly, in states with Tenancy by the Entireties, a deed to a husband and wife creates a joint tenancy automatically even if it does not say so. It is easy to see how people sometimes find themselves in ownership situations that they did not really intend to be in.
Steve Fochler, Attorney at Law
LeVander, Gillen & Miller, P.A.
Have a tricky ownership problem? Contact Steve Fochler via email or call us at 651-451-1831.