Introduction
In Arizona, property law is governed by ARS Title 33. Joint or community property is covered in ARS 33-431.
When multiple people own real estate or property, ownership of the property is typically shared as either joint tenancy or as tenants in common. Under such arrangements, joint owners share the property as a whole rather than owning specific tracts of land or parts of the home. However, while both joint tenants and tenants in common allow for similar joint ownership, their provisions have notable differences.
Joint Tenancy
Joint tenancy property ownership requires all parties have equal shares, and the agreement must be entered into at the same time. This usually occurs at the time of purchase, with all owners listed on the deed or title. The agreement concludes if one of the joint tenants sells their interest, at which point the new owners can enter into a separate joint tenancy agreement, or the agreement can naturally transition to tenancy in common.
Joint tenancy is usually favored by married couples because it simplifies the transfer of ownership when the first spouse passes away. The downside is that to sell your share of the property, you would need the consent of all parties.
Tenants in Common
While joint tenancy requires equal shares of ownership, tenants in common may own differing shares (e.g. one business partner owns 75% and the other owns 25%). A tenancy in common agreement can be initiated at any time, so it doesn’t necessarily need to happen at the time of purchase. It’s not uncommon to see a third or fourth joint owner be added as tenants in common years after the property was purchased.
Tenancy in common can be broken in three ways:
- When a co-tenant buys out another’s share
- When the property is sold and the proceeds are distributed
- When an owner files a partition action, allowing a beneficiary or heir to sell their inherited share of the property
After the tenancy in common agreement is broken, the new owners can enter into a new tenancy in common agreement, or they can initiate a joint tenancy through a written document. The tenancy in common agreement is best for unrelated parties, as it allows the owner to sell his or her share of the property without the consent of other owners, leaving you free to transfer, mortgage, or assign your share. The owner is also able to dictate what happens to their share when they die, usually in their last will and testament. In Arizona, this is the default classification for married couples, typically with a fifty-fifty ownership split.
Right of Survivorship
One of the biggest differences between joint tenancy and tenancy in common is what happens when one of the property owners passes away. Joint tenancy with right of survivorship allows the decedent’s share to pass equally to the surviving owners. For example, if there are three owners with a 33% interest, the surviving two owners will end up with 50% shares when one of the three dies. This transfer of ownership happens immediately upon the decedent’s passing, and does not require probate.
Tenants in common, on the other hand, have no right of survivorship. The decedent’s partial ownership of the property would belong to their estate, and would either be transferred to a beneficiary according to instructions in the will, or, in the absence of a will, would be distributed among their beneficiaries according to the state’s intestate succession laws. Either way, probate would be required to transfer the title or deed.
Formalizing Joint Ownership
Joint tenancy doesn’t require anything beyond titling the property in the joint owners’ names. The one caveat is that to include a right of survivorship, the title or deed will need to specify joint tenants with right of survivorship (JTWROS). Tenancy in common, on the other hand, would require a written agreement separate from the title.
Using Joint Tenancy With Right of Survivorship to Bypass Probate
Using a JTWROS designation can allow property to transfer to the other owner(s) without going through probate, potentially saving a significant amount of time and money. However, while it lessens the complexity of probating your estate down the road, using JTWROS can unintentionally disinherit intended beneficiaries if you’re not careful.
Many aging parents add one of their adult children as joint owner to their real estate and financial accounts, allowing the child access to direct the assets without a power of attorney. While this provides for ease of access, what people fail to realize is that the assets in question would transfer directly to the adult child listed on the account—not to any other intended beneficiaries.
For example, a mother adds her eldest son to her home’s title as a JTWROS, but she wants the home to be sold and split equally between all four of her children when she dies. Unfortunately, regardless of the directions in her will, in this case the title would pass only to the eldest child listed on the title. The child could sell the home and distribute the proceeds as directed, but the disbursement would be considered a gift by the IRS, and would count towards the annual/lifetime gift exemptions, possibly putting the child at higher risk of estate taxes down the road. In this case, the better solution would be to keep the title in the mother’s name, and get the eldest child a power of attorney so he can direct her assets without directly owning them. Alternatively, the mother could add all of her children as joint tenants with right of survivorship.
Other Assets That Can Bypass Probate
Real property held in joint tenancy with rights of survivorship isn’t the only asset that’s able to bypass probate. The following assets, when properly titled, can also pass to beneficiaries without enduring probate:
- Real or personal property held in a trust
- Real property held as tenants by the entirety
- Life insurance policies with a 3rd party beneficiary
- Brokerage or bank accounts held in joint tenancy, or with a transfer-on-death (TOD) or payable-on-death (POD) beneficiary
- Retirement accounts (e.g. 401k, IRA)
For long-term peace of mind, contact us to set up a consultation today. We look forward to helping with your will and other estate planning needs.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.
