Joint Tenancy

What Is Joint Tenancy?

The term joint tenancy refers to a legal arrangement in which two or more people own a property together, each with equal rights and obligations. Joint tenancies can be created by married and non-married couples, friends, relatives, and business associates. This legal relationship creates what is known as a right of survivorship so if one owner dies, their interest in the property is directly passed on to the surviving party(s) without having to go through probate or court system.

How Joint Tenancy Works

Joint tenancy is a form of property ownership normally associated with real estate. Two or more parties come together at the same time to make a legally-binding agreement with one another through a deed. These parties may be relatives, friends, or even business associates. For example, let's say an unmarried couple purchases a house. At the time of purchase, they opt for joint tenancy. The deed to the property will name the two owners as joint tenants.

Since each party has a claim to the property, they also share the benefits. If they decide to rent out the home to another individual or if they sell the property, each party is entitled to a 50% share in the profits. But the relationship also means they are equally responsible to pay for the property including mortgage payments, property taxes, and maintenance. If one fails to live up to the financial obligations, the other party must assume responsibility.

This agreement also creates what's referred to as a right of survivorship. This means that if one person dies, the other party automatically assumes full ownership of the property. This eliminates the need for probate or the transfer of a deceased person's assets to an estate. Probate courts decide the validity of a person's will and divide the assets up appropriately among the deceased's beneficiaries.

There is no need for the property to go through the probate system since a joint tenancy creates a right of survivorship.

Although joint tenancy is most closely associated with real estate ownership, the broader legal concept of joint tenancy with right of survivorship can apply to a range of assets, including businesses and brokerage accounts. The strong association with real estate exists because the term tenancy is seen as synonymous with owning or living in a home.

Advantages and Disadvantages of Joint Tenancy

Although joint tenancy has a number of advantages, there are some distinct disadvantages as well that should be considered before entering into the arrangement.

As mentioned earlier, as long as one joint tenant survives, it avoids the headaches of clearing the property through an estate via a will. Typically, a person's will upon death goes through probate, which is a legal process whereby the courts review a will to validate it. Typically, when a person dies, their assets cannot be accessed or claimed by the survivor until probate releases them.

The probate process also helps determine how a deceased party's assets are distributed if the person doesn't name beneficiaries or doesn't have a will in place. However, the process can easily take months to sort out. A joint tenancy avoids probate and the lengthy legal process that allows the joint tenant to take ownership of the assets immediately.

In addition to sharing the benefits of the property, all of the parties in a joint tenancy share responsibility for the property. For example, one person in the couple can’t take out a mortgage loan on the property and leave their partner with the debt. The joint tenancy applies for all of the assets as well as the debts — meaning if a loan is taken out on the property, both are responsible for the debt.

Divorce or marital issues can complicate a joint tenancy. As stated earlier, all debts are owned by both parties, and neither can sell their assets that are owned jointly without consent from their partner.

Another disadvantage of joint tenancy can appear in the handling of the asset upon the death of one or more of the joint tenants. Joint tenancy gives all the rights to the survivor, so even if the deceased was hoping to pass the value of the property to designated heirs, there is no legal obligation for the survivor to honor that request.

Joint Tenancy vs. Tenancy in Common

One way to avoid losing control of the disposition of the property upon death, some joint owners opt for tenancy in common (JTIC) instead of a joint tenancy. Tenancy in common allows for percentage-based ownership, and shares can be traded and tenants added throughout the life of the arrangement rather than just at inception. In other words, upon death, the assets don't automatically go to the surviving partner as with joint tenancy — instead, the tenancy in common allows the assets to get distributed as stipulated in the will.