A house is often much more than a home. For many California families, real estate is an investment, a safety net, and a means to establish an intergenerational legacy. However, home ownership can come in many different forms. While joint tenancy is a common option that is frequently used in place of an estate plan, joint tenancy agreements can create unexpected complications, family disagreements, property disputes, and the potential for colossal tax obligations.
Joint Tenancy Agreements in California
When two or more individuals decide to purchase a home in joint tenancy, they share a co-equal interest in the property and its title. In general, joint tenancy agreements signify a right of survivorship. In other words, when one of the owners passes away, their fellow tenants receive the deceased person’s share.
The Advantages of Joint Tenancy Arrangements
Joint tenancy agreements are popular substitutes for estate plans because:
- Joint tenancy agreements are easy to establish.
- Joint tenancy agreements seem simple and are often encouraged by realtors, banks, and title companies.
- Joint tenancy agreements provide a convenient, immediate, and automatic means to transfer a deceased owner’s interest in the property to the surviving tenants.
The Disadvantages of Joint Tenancy Agreements
Joint tenancy agreements are incredibly common, in no small part because they let a property’s co-owners avoid probate. However, joint tenancy has distinct downsides, including:
Individuals may own a title as joint tenants. However, certain institutions—such as a trust—cannot always be named party to a joint tenancy agreement, complicating estate plans that seek to eradicate the need for probate in its entirety.
Joint tenancy agreements cannot be altered by a will or a trust. If the property co-owners divorce, separate, or become estranged, they cannot name any new tenants or beneficiaries without first altering the title.
The Unity of Title Rule
The so-called “unity of title” rule requires that all of the owners receive their interest in the property from the same event or at the same time. If, for any reason, the “unity” of the tenants is broken, the joint tenancy is dissolved. This rule can create significant complications. For example, if an owner uses their interest as collateral on a loan or transfers their share to a loved one, the joint tenancy agreement is automatically voided—even if the owner did not inform their fellow tenants of the change.
California homeowners pay capital gains taxes upon the acquisition of a property. These initial costs form the property’s “basis.” However, when the owner dies, the basis is “stepped up” to its current value. Ordinarily, this “stepped up” basis can benefit heirs, who need only pay capital gains taxes on the property’s original value. But in joint tenancy arrangements, the heir inherits a proportionate share of the basis. So, if there are two co-owners, the beneficiary will receive a “stepped up” basis equivalent only to the deceased tenant’s interest in the property.
Joint tenancy arrangements only survive when owners cooperate with one another. However, if and when a tenant decides to transfer their interest to a third party—a bank, a spouse, or a child—the agreement is permanently voided, irrespective of the other owners’ wishes.
Alternatives to Joint Tenancy Agreements
Joint tenancy is not for everyone. Depending on your circumstances, your estate may be better served through:
- The creation of a revocable living trust, which allows the homeowners’ heirs avoid probate in its entirety.
- The formation of a limited liability corporation, facilitating privacy and bolstering a business’s assets.
- A community property arrangement, which allows spouses and their heirs to save big on taxes and avoid the perils of third-party interference.
Since every family has vastly different needs, you should always consult an estate planning attorney before entering into an ownership agreement that could compromise your heirs’ aspirations.
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