How should you hold title to your real property? While clients often want a simple answer to this question, in reality, the analysis is often more complex than it initially appears. For example: How many owners are there? Is the property owned equally? Are the owners married? Is the property encumbered? What do the clients want to happen to the property when an owner dies? If you do not fully consider the various factors unique to your situation, the resulting ownership of your real property may have unintended consequences that can impact both you, your co-owners and the beneficiaries of your estate.
Before taking title to real property, you must understand the different types of ownership available to you, particularly when there are multiple owners involved. Below is a brief discussion of the most common ways to co-own real property in Arizona. While this list does not address all the factors related to property ownership, it serves as a starting point to use in a more in depth discussion with your legal counsel.
TENANCY IN COMMON
In Arizona, owning property as “tenants in common” is the default for co-ownership of real property. If a deed transfers title of real property to two or more individuals in their names with no specific rights of survivorship language, then the owners own the property as tenants in common. For example, if a married couple owns their property as “John A. Smith and Sue B. Smith, husband and wife,” they own their property as tenants in common. Similarly, if two friends own their property as “James Q. Doe and Kyle A. Smith,” then they also own their property as tenants in common.
When individuals own property as tenants in common, each individual owns a certain percentage interest in the property but their interest is considered “undivided,” meaning each owner is entitled to use the whole property. When a tenants in common owner dies, his or her share of the real property does NOT automatically pass to the other owners. Instead, the deceased owner’s share of the real property will likely go through probate and will eventually be transferred to the entitled beneficiaries of the deceased owner’s estate.
RIGHT OF SURVIVORSHIP
By contrast to tenants in common, “right of survivorship” is a type of property co-ownership whereby the surviving owner automatically receives the deceased owner’s share of the real property on his or her death without going through probate. Arizona recognizes two types of right of survivorship ownership, (1) joint tenancy with right of survivorship, and (2) community property with right of survivorship.
Joint tenancy with right of survivorship (JTWROS) is a type of ownership that can be granted between two or more individuals regardless of their relationship to each other. This allows the surviving owner to avoid probate and ensure the property transfers to the surviving owner(s) when the deed expressly states that the owners are electing to take the property as “joint tenants with right of survivorship.” For example, if James Q. Doe and Kyle A. Smith wish to own their property with rights of survivorship, they would need to take title as “James Q. Doe and Kyle A. Smith, as joint tenants with rights of survivorship.” Anything less than the full “joint tenants with rights of survivorship” statement will be insufficient to allow the surviving property owner to automatically receive full ownership of the property on the death of the other owner.
Community Property with Rights of Survivorship (CPWROS) is substantially similar to JTWROS, however, CPWROS is only available to married couples. Therefore, in our example above, friends John Q. Doe and Kyle A. Smith could not own their property as CPWROS since there are not married. But married couple John A. Smith and Sue B. Smith can choose to own their property as CPWROS by titling the ownership as “John A. Smith and Sue B. Smith, husband and wife, as community property with rights of survivorship.”
While owning property with rights of survivorship does serve to avoid probate, this type of ownership may have unintended consequences. For example, in some instances titling property with rights of survivorship can constitute a gift to the other owner which must be reported to the IRS. Rights of survivorship may also expose the property to the creditors of the other joint owner. Furthermore, because the surviving joint owner automatically receives full ownership of the real property on the death of the other owner, that surviving owner receives the property outside of the decedent’s estate plan, which may exclude the beneficiaries of the decedent’s will and not match with their intended wishes.
ALTERNATIVE FORMS OF CO-OWNERSHIP
While tenants and common and rights of survivorship are the two most common types of co-ownership of real property in Arizona, there are multiple other forms of co-ownership that clients may wish to consider, such as Trust ownership, beneficiary deeds, co-ownership agreements, or a combination of rights of survivorship and tenants in common when three or more parties are involved.
Each of these forms of co-ownership have benefits and potential complications. Often times co-owners of real property do not realize their ownership structure is wrong until it is too late. Therefore, it is important that you consult with legal counsel regarding title to your real property, preferably before you execute the deed. To discuss how to best title ownership of your Arizona real property, please contact us at 480-951-8044 or click here to set up a meeting with one of our trusted legal advisors.