Tenants in Common or Joint Tenants – Which Works Best for You?
May 12th, 2017
Estate planning can be complicated for couples in their second or subsequent marriages and have children from those earlier relationships.
Particularly complex issues come into play when there are children from past marriages and wealth that each spouse wants to keep separate from money accumulated during the current marriage.
A common situation is where each spouse decides to leave their share of the principal residence to their respective children when they die.
Tenants in Common
In these cases, the spouses hold the property as tenants in common. So, when one dies, ownership isn’t left to the surviving spouse. Instead it goes to the decedent’s estate and beneficiaries.
The first part of the post-mortem process is fairly straightforward, but involves extra expenses. The estate will have to go to probate and pay some fees because it now owns half the house. Those charges are based on the value of the estate. The basic charge is $208. Additional fees range from 0.04 per cent to 1.6 per cent of the value of assets exceeding $25,000.
For income tax purposes, however, the situation can become complex. Say it is the husband who died and he left his half of the principal residence to his children, who do not live in the house. They will have to pay income tax on any increase in value of their half ownership of the house from the date of the parent’s death to the date the house is sold.
Often the will contains provisions that allow the surviving spouse, in this case the wife, to remain in the home until she chooses to move or remarries. The children of the deceased spouse retain their half ownership in the house, but the widow effectively holds that interest in trust for them.
This is a clear advantage for the children, because both half-ownerships of the home remain tax-exempt and fall under the principal residence exemption rules until the surviving spouse moves, remarries or dies. The children will inherit half of the house free from taxes on any increase in the value of the home during the time the widow (or widower as it may be) lives in the house.
Some couples try to avoid probate fees by holding the property as joint tenants rather than tenants in common. When real estate is held this way, the property goes directly to the surviving spouse. It does not become part of the will or the estate.
The surviving spouse not only avoids probate, she also gets the income tax exemption because the house remains a principal residence but has been completely transferred to her. She can do whatever she wants with both halves of the property.
Even though there may be an understanding to leave half of the residence to the deceased spouse’s children, this may not happen if the surviving spouse is sick or otherwise unable to carry out those wishes.
The spouses may have had wills that provided that the property would ultimately pass to the children of both spouses, on the death of the last of them. However, the surviving spouse can change his or her will so that the property goes only to that spouse’s children, and the children of the deceased spouse would receive nothing.
If it is important to you and your spouse in a second marriage to keep previously accumulated wealth separate so that it may be inherited by the children of previous marriages, using the tenants-in-common strategy may be the way to go. Although that involves probate costs and time, the surviving spouse is allowed to live in the house through a provision of the will, and the larger tax, typically on increased property value, will be avoided.
Consult with your accountant to determine which strategy best suits your particular situation.