People often don’t realise that the law allows two or more people to own property in more than one way. The two most common forms of ownership are joint ownership and tenancy in common. How do these work?
The way it was explained to me in law school is that joint ownership is when multiple people own the same thing, but it isn’t divided into shares. It’s like you and I both own a big cake, but it hasn’t been cut in half yet: we each own half of the whole. In contrast, a tenancy in common is when the cake has been cut in half. In that situation, we each own the whole of one half.
Oh dear, it all sounds a bit dull. Who really cares? Half of the whole, the whole of the half – I don’t eat cakes anyway, you say. Well, just hold on to your hat, it’s going to get really exciting very soon. I promise. Let’s move forward. There are two crucial issues with these ownership methods. The first is that joint ownership is the default method. In other words, if we want to create a tenancy in common for the cake, we have to write this out on paper and sign it. The second is that, if one joint tenant dies, the other one automatically inherits the dead person’s interest in the property.
What this means is that a piece of property might be bought by two persons, let’s say two friends, for their use, and one of them dies. Instead of the spouse and children of the deceased person getting that person’s share of the asset, the other surviving friend might get that property. And the property might be very valuable. See the problem?
Now, this discussion is a by necessity simplification. Partnerships in business contexts are controlled by statutes in most countries, and may include some default system for dealing with inheritance of a dead partner’s interest in the partnership business. Also, many types of property, such as land, have special rules applying to them, where the owners have to select a method of ownership at the outset: joint versus tenancy in common, so that no surprises will happen when one of them dies. But there are enough situations where the two basic rules described above will apply, and will mean that a property owner’s heirs may fail to inherit valuable interests in property. Which is why it’s a good idea to think carefully about any property you own and make appropriate arrangements, such as setting up tenancies in common via written agreements, and making a Will disposing of your property in a planned way.
[The author, James Irving, is a business lawyer in Perth, Australia. Visit the Irving Law website for further information on legal topics. This post is not intended as legal advice for any particular person, and reflects the law of Australia at the time of writing. Photo credit: Novar House by Sylvia Duckworth, a public domain image courtesy of Wikimedia Commons and used here under a CC BY-SA 2.0 licence.]