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Insights

When contemplating their estate planning, people often jump straight to distribution, or the ‘who gets what’ aspect of their Will. This is a pointless exercise if there is no knowledge or understanding of what assets you hold and how you legally hold them. The purpose of this first part in our series is to start at the nuts and bolts of asset ownership and go from there.

Do you know how you own your home or investment properties? Often couples reply when they come to see me with “we own it together” or “we own it jointly”.

At law there are two different ways to own property with another person, and the differences can have important implications when it comes to estate planning.

Joint tenancy

Joint tenancy is a common way to own property with your spouse or partner, or for multiple trustees of a trust. It is as close as you can get to owning property as a single entity. With a joint tenancy you do not have a separate identifiable interest or share in the land.

Each joint tenant is entitled to possession of the whole of the land and every part of it (also known as “unity of possession”) and together holds a single estate or interest in the land (also known as “unity of interest”). This means that each joint tenant cannot separately deal with their interest in the property independently of the owner joint tenants.

Tenancy in common

A tenancy in common creates identifiable shares in a property. The owners don’t have to have an equal share. For example, two owners could each have a 50% share, or there could be a 90% and 10% ownership.

Each tenant in common is able to sell and deal with their interest in the property separate to the other owner.

An explanation without the legal language – It’s a piece of cake!

Think of a joint tenancy as a couple on a date sharing dessert. One piece of cake – two spoons. Each person can eat as much or as little of the cake as they like. A tenancy in common is cutting the one piece of cake in half and popping it on two plates – you’re still sharing, but now you know exactly how much your share is and you can choose to give your share of the cake away.

What this means for your estate planning

If property is owned as joint tenants, then it is not part of the assets dealt with in your Will.

As joint tenants do not own defined shares, when one owner passes away, the remaining owner automatically (with some forms to be filled out) becomes the owner of the whole property regardless of what your Will says.

The same principle applies to joint bank accounts. The surviving joint owner will become the full owner or account holder and this does not form part of your estate.

That surviving owner can then deal with the asset as they see fit. The deceased owner has no control over who the property will go to after the death of the surviving owner. For this reason, owning property as joint tenants is common amongst couples who are in their first marriage or defacto relationship. There is often no issue as many people are inclined to leave property to their children after their spouse.

However, this may not be so easy in the case of a second marriage or defacto relationship, where one partner wants to ensure that their children (particularly from the first marriage) ultimately receive a share of the property, rather than only the children of their surviving partner.

Ownership as tenants in common allows each person to deal separately with their interests in the property under their Will. While this may be appropriate for an investment property that neither person lives in, it does not work so well for your interest in a home that you share with your partner or spouse.

By gifting the share in the property under the Will to a beneficiary, the beneficiary has the right to possession of the property with the other co-owner. This can be difficult in situations where the surviving spouse still needs full use of the property as it is their home or they do not get along with the beneficiary.

Careful estate planning means looking outside of the box

There are a number of solutions that can be considered when creating an estate plan for owners who are part of a blended family.

Where the owners own the property as joint tenants and the next generation needs to be protected, a contract of mutual wills could be useful. This creates a contract between couples to agree to act in such a way and deal with their property that preserves the wishes of each person’s estate. Or you can convert the ownership from joint tenancy to tenancy in common.

Where the owners own the property as tenants in common, it may be effective to create a life interest or a right of residence for the surviving spouse. This essentially transfers legal ownership of the property to a beneficiary (for instance, a child of the deceased owner) but allows the surviving spouse to live in the property for as long as they wish. On the death of that surviving spouse, the beneficiary will then be able to occupy, lease out or sell the property.

Life interests and rights of residence can be complex arrangements, and we will consider these further later in our series.

The ways in which you own your property can dictate how you can give and deal with your property, not only in your lifetime, but also in death. It is important for people to be aware of how they own property so that there are appropriate arrangements and expectations. At Kells, we take the time to go back to the nuts and bolts to ensure that appropriate, efficient arrangements will be in place to effect your wishes and provide peace of mind.