Jointly owning property can be precarious to say the least.
You are considering owning property jointly with a non-spouse.
Maybe you are considering doing so with another family member.
Perhaps a friend or business associated has made the suggestion.
Should you do it?
According to a recent Inside Indiana Business article titled “Risky: Property Owned with a Non-Spouse,” carefully consider the consequences before agreeing to such and arrangement.
Loss of Control.
Jointly owned property involves entering into a “joint tenants with rights of survivorship” (JTWROS) legal agreement.
This means the surviving owner will automatically inherit the whole property when the other passes.
Your control regarding what happens to your postmortem interest in the property will be lost.
You cannot bequeath this portion to your family in a will or trust.
If the co-owner is not a spouse, he or she can transfer his or her interest in the property without your consent while you are both living.
If you jointly own property with another individual, the property can be subject to creditor claims of each joint tenant.
Let us say you own a house with your sibling as JTWROS.
This sibling files for bankruptcy.
The creditors could claim his portion of the cabin.
If you do not purchase his half, you could be owning property with a complete stranger.
Potentially Higher Taxes.
Jointly owning property could simplify transferring the property at your death, if the individual is the intended heir.
Simple is not always better.
This transfer could trigger both a gift tax while you are alive and a higher capital gain tax for the surviving joint owner after your death.
If you add a non-spouse to your title, this is considered a “gift” based on the current fair market value of the property.
The capital gains tax will also be higher because “inherited” property receives a step-up in basis when transferred to an heir on death.
This step-up in basis would decrease the capital gains tax implications.
If your joint owner is your spouse, then when you die only your half of the estate would receive a step-up in basis.
If your joint owner is not your spouse, then determining the step-up can get a lot more complicated.
JTWROS vs. Tenants in Common.
You may have other options besides taking title as JTWROS.
You may be able to use a “tenants in common” ownership agreement.
How are they different?
With JTWROS, the surviving owner receives the property.
With tenants in common, the decedent may determine who receives his or her share in the property via directions in a last will or trust.
The co-owner can also transfer his or her share without the approval of the co-owner.
For many people who are considering taking title to property with a non-spouse, look before you leap.
There are as many negatives as there are positives to any title arrangement.
Discussing your goals with an experienced estate planning attorney will help you make the best decisions for you and your loved ones.
Reference: Inside Indiana Business (December 1, 2019) “Risky: Property Owned with a Non-Spouse”