When buying a property, it’s important to own that property in a way that aligns with your estate planning goals.
Should you own property jointly, solely, or as tenants in common? Understanding the pros and cons of different ownership options can help you make informed decisions about how your assets will be distributed on your death.
Joint ownership
Joint ownership means that each co-owner has an equal share in the property. When one owner passes away, their share automatically transfers to the surviving owner(s) without the need for probate.
Pros:
- Simplicity: the property automatically transfers to the surviving owner (most often your spouse or partner) on death, avoiding the need for obtaining probate.
- Shared responsibility: both parties share the burden of maintenance and expenses.
Cons:
- Estate planning challenges: because the property passes to the surviving joint owner(s) on your death, it doesn’t form part of your estate and you can’t decide where it goes in your Will.
For couples who only have shared children, joint ownership can be a straightforward choice. The property passes automatically to the surviving member of the couple, potentially avoiding the need for probate.
For those with children from previous marriages, joint ownership may present issues if you aren’t aligned on how you each wish to benefit your children.
Joint ownership is also generally not the ideal option for friends or other relatives, as it can lead to complications in estate planning and may not accurately reflect each individual’s intentions for their share of the property.
Example of joint ownership in marriage
John and Mary are a married couple who decide to buy a house together for them and their three children. They choose joint ownership because it simplifies the process if one of them passes away. If John were to pass away, his share of the house would automatically transfer to Mary without the need for probate. This arrangement ensures that Mary can continue living in the house without complications, and on her death she can give instructions in her Will about who will receive it.
Sole ownership
Sole ownership means that one individual holds the title to the property entirely by themselves. This gives the owner full control over the property and the ability to decide who inherits it upon their death.
Pros:
- Full control: the sole owner has full control over the property, and they can decide how they use it and who inherits it. The sole owner has complete control over the property and all related decisions, so they can freely sell, lease, or transfer the property without needing consent from others.
- Simple estate planning: estate planning is clear and straightforward, as the property will be part of the owner’s estate. This allows for flexibility in deciding how the property should be managed and distributed after death.
Cons:
- Responsibility: the sole owner is solely responsible for the property’s maintenance and costs.
- Probate process: it will be necessary to go through the probate process upon the owner’s death to deal with the property. This means it can be more costly and take more time to get the property to the intended beneficiaries.
Single individuals or those with specific estate planning goals may prefer sole ownership for the control it provides over the property and where it goes upon their death.
Sole ownership is also common in second marriages, especially when one partner purchased the home with their own funds and wants their children from a previous marriage to benefit. In such cases, the owner might leave the property to their children but grant a right to reside to their second spouse. This arrangement allows the spouse to live in the house until their death, after which the property passes to the original owner’s children.
Example of sole proprietorship for individuals:
David is a single individual who buys a property on his own. He prefers sole ownership because it gives him full control over the property. David can decide how to use the property and who will inherit it. In his will, David specifies that his property should go to his niece, Emma, upon his death. This clear estate planning ensures that Emma will inherit the property, although it will need to go through probate.
Example of sole proprietorship in second marriages:
Sarah is in her second marriage and has children from her first marriage. She buys a house with her own funds and opts for sole ownership. In her will, Sarah leaves the property to her son, Michael, but grants a right to reside to her second husband, Tom. This means Tom can live in the house until his death, after which the property will pass to Michael. This arrangement ensures that both Tom and Michael are taken care of according to Sarah’s wishes.
Tenants in common
Tenants in common is a form of co-ownership where each owner holds a distinct share of the property. These shares can be equal or unequal, and each owner has the ability to leave their share to their chosen beneficiaries.
Pros:
- Flexibility: each owner can hold a different percentage of the property, which can be tailored to reflect their financial contributions.
- Estate planning control: each owner can decide who receives their share of the property on their death.
Cons:
- Probate: each owner’s share will require probate on their death to transfer the property, which can be time-consuming and costly for the beneficiaries.
- Joint decisions: any decisions regarding the property will require agreement from all owners, which can lead to conflicts or delays.
- Shared responsibility: All owners are responsible for the maintenance and expenses of the property, which can lead to disputes if one party is not contributing their fair share.
Example of tenants in common for investor friends
Adam, Brody, and Caroline decide to purchase an investment property together as tenants in common. Adam contributes 50% of the purchase price, while Brody and Caroline each contribute 25%. This arrangement allows them to own the property in proportion to their contributions. In their wills, Adam leaves his 50% share to his daughter, Brody leaves his 25% share to his son, and Caroline leaves her 25% share to her sister. This setup provides flexibility and control over their respective shares, but they must all agree on major decisions regarding the property.
Example of tenants in common for second marriages
Jane and Mark, both in their second marriages and having children from their first marriages, buy a home as tenants in common. They decide that Jane will own 70% and Mark will own 30% to reflect how much they contributed to the purchase price. In their Wills, they leave their shares to their respective children, with a right to reside granted to each other. This ensures their respective children inherit their share of the property while allowing the surviving spouse to live in the home for life.
Other Things to Consider
CGT Considerations
Before making any changes to your property ownership structures, it’s important to consider any potential capital gains tax (CGT) implications. Any assets acquired before 20 September 1985 are considered ‘pre-CGT’ assets, so any subsequent changes in the property ownership may remove the pre-CGT status for the whole or part of the property.
Risks of estate claims
It’s also important to be aware that assets that form part of your estate may be subject to claims. For individuals in first marriages or relationships, joint ownership can be advantageous as it may reduce the risk of claims against the estate of the first to die. Conversely, in second marriages, holding property solely with the intention of passing it to your children upon your death does not guarantee that this will occur, as your spouse will be eligible to make a claim against your estate.
Conclusion
Choosing the right way to own property is a vital part of estate planning. Whether you opt for joint ownership, sole ownership, or tenants in common, each has its own benefits and drawbacks. Understanding these options and how they align with your personal and family circumstances can help you make informed decisions.
It’s important to get advice from an experienced estate planning lawyer to ensure your property and assets are managed according to your wishes, providing peace of mind for you and your loved ones.
Our Wills & Estates Team is experienced with these matters and, backed by our Property Team, can ensure that your property ownership structure aligns with your estate planning goals. To discuss your options with one of our knowledgeable lawyers, you can call us on 9063 0300, send us an email, or click here to make an appointment.
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