Pros and Cons of Severing Joint Tenancy

Pros and Cons of Severing Joint Tenancy

Pros and Cons of Severing Joint Tenancy

Joint tenancy is a legal right to property that provides the owner an undivided right to the enjoyment of the property. It is generally inexpensive to establish and works in a simple and straightforward way.

Joint tenancy is a form of property ownership where two or more individuals concurrently own equal shares in the property.

The defining characteristic of a joint tenancy is the right of survivorship, which means that if one of the owners dies, their share automatically passes to the surviving owner(s).

Severance of a joint tenancy can occur when one of the four unities (time, interest, title, and possession) that are required to maintain a joint tenancy is destroyed. This can be accomplished by conveying your joint tenancy interest to any third party, such as through gift or sale.

Once terminated, a tenancy in common is formed between the third person and any remaining co-tenant(s).

However, joint tenancy and its potential impacts on estate planning can, in certain circumstances, result in unanticipated and unwelcome legal consequences.

Pros of Severing Joint Tenancy

  1. Flexibility in Estate Planning: Severing a joint tenancy can provide flexibility in estate planning. For instance, a joint tenant may change their mind about who should receive their property interest at death, or a spouse in a second marriage may want to leave their joint tenancy interest in the married couple’s home to the children from the first marriage, instead of to the spouse. One of the primary advantages of severing joint tenancy is that it can help avoid probate. When a joint tenant passes away, their share automatically passes to the other tenants without the need for probate proceedings.
  2. Avoidance of Unwanted Legal Consequences: Severing joint tenancy can help avoid unwanted legal consequences. For example, if one joint tenant wants to sell the property, but the other joint owner is refusing to sell, severing the joint tenancy can resolve this issue.
  3. Control Over Property: Severing joint tenancy can give an individual more control over their property. For instance, a joint tenant can convey the joint tenancy interest to himself or herself, which will sever the joint tenancy.
  4. Income Allocation:In the case of income-generating properties, severing joint tenancy permits co-owners to receive income in unequal shares, providing a fair distribution based on ownership interest.
  5. Protection in Divorce:Severing joint tenancy can be common in divorce proceedings, ensuring that an ex-spouse doesn’t automatically inherit the property upon the owner’s death.

Cons of Severing Joint Tenancy

  1. Tax Consequences: Severing joint tenancy can have unintended tax consequences. Under the income tax rules, each joint owner with a right of survivorship is presumed to have an equal interest/ownership in the asset. When a joint tenancy is severed, it can disrupt the estate plan and result in unexpected tax liabilities.
  2. Potential Loss of Control: Severing joint tenancy can potentially lead to a loss of control over the asset. For instance, if a joint tenant transfers their interest to another person, they may lose control over how the property is managed.
  1. Complexity: Owning property as tenants in common can be more complex than joint tenancy, as it requires specifying ownership percentages and may lead to disputes.
  1. Legal Complications: Severing joint tenancy can lead to legal complications. For example, if a joint tenant wants to buy out the other tenant’s interest, they would need to agree on a purchase price and prepare a deed to convey the property, which can be a complex process.

Conclusion

While severing joint tenancy can provide flexibility and control, it can also lead to tax consequences and potential loss of control over the property. Therefore, it is crucial to seek legal and tax advice before deciding to sever a joint tenancy.

In conclusion, the decision to sever a joint tenancy should be made after careful consideration of the potential legal and tax implications. It is advisable to consult with a legal or tax professional to understand the potential consequences and to make an informed decision.

 

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