Choosing Form of Ownership Offers a Planning Opportunity

Making conscious decisions about what form of ownership to choose for investments offers a financial planning opportunity which many people don’t utilize. Other than deciding who needs to …

Making conscious decisions about what form of ownership to choose for investments offers a financial planning opportunity which many people don’t utilize. Other than deciding who needs to sign the checks, some investors don’t pay much attention.

Because property ownership is governed by state law, this discussion is somewhat general. In addition, if you live in a community property state, your options may be limited.

Forms of joint ownership

Generally, when two or more people own property together, tenancy in common is the default form of ownership. In a tenancy in common, each owner has a specified fractional share of the entire property. Kenneth Sprang, a lawyer with the Global Law Group and adjunct professor at Catholic University Law School, explained that each owner of a tenancy in common can sell, mortgage, bequeath or give away his/her share of the property without permission from the other owners. This poses potential business and credit risks that make this form of ownership undesirable in many situations.

Some couples or groups choose to invest as joint tenants with right of survivorship or JTWROS. This form of ownership is similar to a tenancy in common in that each owner has the right to use or possess the whole property. The main difference is that if one owner dies, then the surviving owners will own the entire investment. "The property is not inherited, it just is vested in the survivor(s) as a matter of law," Sprang explained.

Further, he said, though a co-owner cannot bequeath his/her interest in the property in a will, a co-owner can sever the tenancy while still living. If there are at least two remaining joint tenants from the JTWROS agreement, the right of survivorship remains with respect to their interests, but the new owner of the severed interest becomes a tenant in common with them. If only two persons own the property as JTWROS and one sells or assigns his/her interest to someone else, the survivorship feature is destroyed and the two co-owners become tenants in common.

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A third option in some jurisdictions is to invest as tenants by the entireties, a form of ownership available only to married persons. It includes the right of survivorship, but neither owner can convey, mortgage or assign the property without the other. "The really helpful advantage is the creditors of one spouse cannot usually get at the property," according to Sprang. A tenancy by the entireties is ended only by divorce or the death of one spouse.

The risk posed by exposure to co-tenants’ creditors leads Max Barger, a lawyer with Paley Rothman in Bethesda, Md., to recommend caution when investing with another person—even your spouse. "When you are a joint tenant (with right of survivorship) with someone, you expose yourself to quite a bit of risk; all of your joint tenants’ creditors become your creditors," he said. There are situations in which co-tenancy may be considered, but "it should nearly always be backed-up with an ownership and indemnity agreement," Barger advised.

Offering an example of the hazards of co-tenancy, Barger noted: "With a tenancy in common, you could become a co-owner with your co-tenant’s ex-spouse."

Sprang and Barger both suggested that groups of investors who are not married to each other consider setting up a trust. Another option is setting up a limited liability entity (such as an LLC) for joint investments in real estate, precious metals, or commodities. "It protects you from your partner’s creditors and affords much of the convenience most clients desire," Barger advised.

Community property

Nine states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—have unique community property laws. Generally, in these nine states almost all property acquired by either spouse during a marriage is community property and considered jointly owned, with each marriage partner owning half. In some states, the marriage partners have a right of survivorship in community property.

In most community property states, property acquired by one partner before the marriage or given to him/her during the marriage is considered separate property. Investors who have and want to maintain separate property need to be sure not to comingle those assets with community property. For example, if an investor living in a community property state sells separate property, depositing the sale proceeds in an account that is not separate turns them into community property.

In some states, a person can bequeath his/her share of community property to someone other than a spouse. This presents both hazards and planning opportunities that should not be taken lightly.

Investors contemplating joint investments would be wise to consult a professional adviser (lawyer or CPA) before deciding what form of ownership to choose.


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