Defining the Ownership – Joint Tenancy and Tenants-in-Common
This a very thorny issue. Many people assume when they own real estate together when one dies, the other owns it all. Much like my husband and I own the house and if either of us dies, the other owns it in full. Not necessarily the case.
In the Estate Planning and Will preparation process, the exact way the Family Home title has been registered is critical. While most husbands and wives assume: “when he dies, all to the wife”. Not necessarily. This is critical and exceedingly expensive if not checked.
Let’s say that there is a property in your neighbourhood that is for sale. You’re interested in buying it, but you might not have all the funds available to do so. You decide to involve your two best friends in the deal, and the three of you enthusiastically head off to meet your lawyer. The lawyer, in turn, asks the question: “So, how do you want this ownership to be set up?”
Rather than looking at your friends and shrugging helplessly, it’s a good idea to understand two fairly popular legal arrangements available for the purpose of asset ownership. These are joint tenancy and tenants-in-common. The following discussion will introduce you to the concepts, and help determine which might be the right set-up for your particular scenario.
Please note: Simply, and blindly, saying it’s in our names together (husband and wife) is not sufficient. Read on.
Defining the Ownership
Joint tenancy (JT) and tenants-in-common (TIC) are similar in that they allow more than one person, or more than one entity, to own an asset. That’s the only similarity between these two legal structures.
A JT is structured as an equal partnership, with equal ownership rights. When you and your friends (or your spouse) enter a joint-tenant arrangement to acquire and own the property, you each own an equal percentage of that property.
In both JT and TIC structures, you own an “undivided interest” or “fractional share” in the property. That fractional share, however, might not be the same percentage as those of your friends. You could, for example, have 48% of the interest in the property, with your friends each having 26% of the remaining interest.
To reiterate, from a basic ownership structure, entering into a joint tenancy agreement means you have an equal share in the property with your partners. And, as a member of a TIC, you’ll also own a fractional share of that asset, which could be more or less than your partners. But there are significant differences should one of the owners dies.
Let me make this very clear: In a JT, you die, the surviving person owns it 100%. In JIT, you die, your Estate, with your Will or, as determined by government law, someone owns your interest. And almost invariably Probate Fees are payable and Probate will be required.
Joint Tenancy — A Partnership
Four conditions are necessary when it comes to creating a joint tenancy. These are:
- Unity of Possession, in that each owner holds an undivided right to possession
- Unity of Interest, in that each owner holds an equal interest in the property
- Unity of Time, in that all owners must acquire ownership at the same time
- Unity of Title, in that all names are on the same deed.
And, as joint tenants, your one main advantage is what is known as “rights of survivorship.”
This concept means if one of the owners dies, her/his share automatically passes to the other partners. While “Rights of survivorship” allows the avoidance of potentially costly and time-consuming Probate process, it also means the deceased part-owner can’t pass on his/her percentage of ownership to his/her heirs. On his death he/she owes nothing. All goes to the surviving joint owner.
Another downside of a JT is that the ownership arrangement you have remains until all three of you agree it’s time to sell. If one wants out of the partnership before the others, it isn’t going to happen, unless there is a court process.
To reiterate, Joint Tenant property ownership arrangements are ideal if you want to sidestep costly Probate following the death of one of the partners. However, a JT is a partnership, and as with any partnership, it’s important that everything pertaining to the ownership, maintenance, and sale of the asset be very clear upfront, to avoid conflict and confusion later on.
Most frequently, ‘Joint Tenancy’ is used for a matrimonial home: Husband dies; wife owns outright. No Probate is necessary.
Another caution: It’s a serious mistake to assume: “well, my husband and I own our house”. Not sufficient.
Tenants-in-Common — Fractured Ownership
Unlike the scenario with a JT, a TIC allows you to sell (or bequest, by a Will, or if no Will, then by government decree, transfer) your shares to someone else whenever you want (subject to the agreement, if any and all should have completed beforehand). You usually don’t need your partners’ stamp of approval if you want an out (i.e. to sell to someone else or transfer to a beneficiary). By the same token, you can buy shares in a TIC structure whenever you want. You can even exchange TIC shares for other TIC shares, subject to certain Canada Revenue Agency rules, and defer payment on capital gains. This means an easier exit from your investment.
Another benefit is that you can bequeath those shares to whomever you want when you die. Unlike your ownership share reverting to your partners in the event of your demise, in the use of TIC, you can pass those shares down to a beneficiary or heir.
One thing to keep in mind, however, is that as a TIC member, you can’t sell the actual property — as opposed to one’s interest — without 100% agreement from the other investors, nor can a management decision be made without a unanimous vote from the entire group. And, that group can be large — a TIC can have multiple investors. One rogue member could stonewall a potential sale or decision.
Additionally, while you can sell your shares to just about anyone (an advantage), there isn’t a ready-made resale market for these shares (a disadvantage). Meanwhile, if a TIC partner passes away, that individual’s vote is transferred to his/her heir (notably, not the other partners) who might not be readily available, and would need to be tracked down. And worse still, the remaining partial owners may not want that “new person” into their “club”.
Which is the Right One?
It depends totally on the investment, the intentions of the participants and the documentation to revise the transaction.
As with any kind of ownership structure, there is no “right” or “wrong.” Much depends on what you want from an investment, and what type of ownership relationship will be the most effective for your portfolio. This requires a discussion with your financial advisor or legal counsel.
Last Word of Advice
Most husbands and wives assume and plan for their surviving mate to own the matrimonial home, free of taxes and legalities upon death. This is more than charming and appropriate. But beware: that is totally dependent on planning ahead. Check with me.
Explore information on When Canada Revenue Agency is a Beneficiary of Your Estate
Justice Ontario Family Law Act
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This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.