Two well-known options for property ownership between two or more part-owners are joint tenancy and what is known as community property with right of survivorship. Property ownership can be split in a couple off various ways, a reality that becomes important as you start creating your Estate Plan. Knowing how various property titles are held can assist you in choosing the appropriate arrangement for you and your spouse. Property usually is reference to real estate, but additionally can include other valuable assets. The below post is going to assess two distinct ownership methods: joint tenants vs community property. Each of these arrangements looks somewhat different, and property owners might want to understand the benefits of each case better prior to deciding. Keep reading to find out more concerning joint tenants and community property:
Joint Tenancy, what is it?
Joint tenancy are legal arrangements when there are two or more part-owners on a property. Each owner in joint tenancy agreements has a fair share in ownership and responsibility over that property. The term is commonly used to indicate real estate ownership, but a joint tenancy agreement can additionally be reached with personal property, financial institution accounts, and business ownership. Think about a married couple purchasing a house together. when they buy the house as joint tenants, each of them would have the same access and authority over the property.
Joint Tenancy With Rights Of Survivorship, what is it?
JTWROS is one of the various ways ownership of assets can be split. What stands out regarding this arrangement is that the right of survivorship determines how the asset is going to one day be inherited. In JTWROS agreements, co-owners are unable to pass their portion to an heir of their choosing following their passing. Conversely, the other co-owner(s) would inherit their share of the property. Once again, in the case of the married couple, following the passing of one spouse, the other spouse would become the singular owner of the property.
Pros of Joint Tenancy
Joint tenancy is the most typical ownership agreement, probably because of the straightforwardness of the agreement. A lot of first-time home buyers use this approach when buying property with their significant other. Below are some of the other pros of joint tenancy:
- Joint tenancy can make buying property more cost-effective, as each co-owner can put money into the down-payment and mortgage of the house or asset.
- All co-owners have equal obligations to maintain the property.
- Co-owners can avoid allowing the property go through probate following the passing of an owner. Instead, ownership is going to automatically be transferred to the other co-owner(s).
- In real estate investments cases, joint tenancy usually motivates co-owners to collectively maintain the property and manage it accordingly.
Cons of Joint Tenancy
Joint tenancy isn’t the only way for co-owning a property, making it important to think about the possible cons prior to opting for this arrangement. Below are a few things to consider prior to deciding on a joint tenancy arrangement:
- Business partners might want to choose an heir for their portion of an asset, instead of allowing a partner to automatically inherit their share.
- Couples that decide on joint tenancy agreements are going to need to determine how to divide the property following a divorce, in which could result in legal action.
- Co-owners have an equal responsibility for their share of the mortgage payment or debt related to the asset. When one owner makes no attempt to financially contribute, the other co-owner is going to be obligated to make up for the loss or face going into default.
- Should the loan of an asset go into default, both co-owners are going to be accountable for the debt. Each owners’ credit is going to be affected.
Community Property, what is it?
Community property is an ownership classification solely for married couples. Anything deemed community property belongs equally to each of the spouses, no matter which spouse obtained the property, assets, and/or income. There are distinctive states that are community property ones. These include Arizona, California, Nevada, Idaho, Louisiana, Washington, New Mexico, Texas, and Wisconsin. Community property can comprise of earned income, personal belongings, real estate, and oftentimes individual property that has become “commingled,” meaning it can’t be recognized and separated. All in all, gifts, inheritances, and property obtained by one spouse prior to the marriage are free from these considerations. Each community property state has somewhat different provisions in divorce cases. Prenup agreements also can be used to avoid specific factors of community property ownership.
What does Community Property with Right of Survivorship Mean?
CPWROS is an agreement in which, following the passing of a spouse, ownership of the property systematically transfers to the living spouse. The property and/or asset consequently avoids probate entirely.
What Happens to Community Property Should One Spouse Pass Away?
When one spouse passes away, community property denotes that the other spouse is going to get full ownership of the property or asset. For instance, if a married couple bought a house together as community property, the living spouse is going to then have full ownership of the house. The community property would then bypass a conventional probate process, as ownership would be transferred instead of inherited. The living spouse is going to also be eligible for a double step up in tax basis for the assets. Meaning that the property is going to be taxed based on the value at the time of the deceased spouse’s passing.
What are the Differences Between Joint Tenants vs Community Property with Right of Survivorship?
The primary difference between joint tenant vs community property with right of survivorship is the way the property gets taxed following the passing of a spouse. Through joint tenant agreements, the capital from the selling of a property (following the passing away of a spouse) is going to be open to the capital gains tax. If the property was held as CPWROS, and later sold following the passing away of a spouse, the proceeds from the sale are going to be free from the capital gains tax. One other distinction is that anybody can buy property as joint tenants, but only married couples can retain community property. Likewise, joint tenancy agreements can be broken when one owner sells or transfers their portion of ownership to another individual. Community property agreements usually only conclude when assets get divided through a divorce.
Writer, S. (2022, February 11). Joint tenants VS community property: Right of survivorship. Trust & Will. Retrieved July 29, 2022, from https://trustandwill.com/learn/joint-tenants-vs-community-property-with-right-of-survivorship
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