Avoiding probate is a common estate planning goal for good reason. Probate can be costly, both in terms of time and money and loss of privacy. One way to keep real property out of the probate process is to co-own the property with an adult child; however, you must create the right type of joint ownership for this strategy to work and even if done correctly, co-ownership can have unintended consequences. Moreover, there are things other than probate avoidance to consider if you are contemplating co-ownership with an adult child. Here are some things you should know about co-owning property with an adult child in Maryland.
What Types of Joint Ownership Are Available in Maryland?
Each individual state decides what types of joint ownership will be recognized and what is required to create each type of joint ownership. In Maryland, there are three different types of joint tenancy that can be created for real property. Understanding the difference between the three types of joint ownership is crucial to achieving all your estate planning goals.
- Tenancy in Common. Any two or more co-owners can create a tenancy in common. If you and an adult child hold property as tenants in common, you each hold a percentage share of the property. Tenants in common can have equal shares, but they can also hold title in unequal shares, meaning you could own 60 percent of the property and your child 40 percent. Nevertheless, tenants in common have an undivided interest in the property, meaning you both have the right to use and enjoy the entire property. There is no right of survivorship with tenancy in common. As such, your share of the property will not pass directly to your adult child upon your death. Instead, your share in the property will become part of your estate and be required to go through probate.
- Joint Tenancy. This type of co-ownership means that you both own the entire property and there is a right of survivorship. This means that if you die, your interest in the property will automatically transfer to your adult child without the need for the property to go through probate and vice versa. Note that Maryland has a presumption against joint tenancy, meaning that if the language is ambiguous, missing, or contradictory the law will default to a tenancy in common, not a joint tenancy. Moreover, creating a joint tenancy also requires the “four unities of interest” to be present, including:
- Unity of Time. All owners’ interests must have vested at the same time (“vested ownership” means that the unconditional ownership of the property for all owners was completed at the same time)
- Unity of Title. All owners’ interests must be acquired from the same deed
- Unity of Interest. All owners have equal interests in the property
- Unity of Possession. All owners have equal and concurrent rights to possess the property
- Tenancy by the Entirety. Tenancy by the entirety is the third option for joint ownership of real property in Maryland. This option, however, is only available to a married couple. Therefore, if you are contemplating joint ownership with an adult child, tenancy by the entirety is not an option.
Is Co-Owning Property a Good Idea?
Joint tenancy can be an effective method of making sure your adult child gets your house when you die without the property being held up in probate; however, make sure you consider other potential consequences of creating a joint tenancy with your adult child. Keep in mind, for example, that once you put your child on the title to your property your child has an ownership interest in the property. That interest may be able to be sold or encumbered, meaning you could potentially lose half the monetary value of the property. If your child is married and goes through a divorce, your son or daughter-in-law could end up owning half of the property as part of the division of property. Finally, you will not be able to encumber or sell the house without your child’s agreement.
Joint Tenancy can be easily and inexpensively set up through the execution of a new deed. However, be careful because there may be unintended income tax consequences, which cost your adult child tens of thousands of dollars in capital gains tax.
While co-owning property with an adult child may appear to bea wise choice for estate planning purposes, it is imperative that you understand the risks of and alternatives to co-ownership and discuss the advantages and disadvantages of such any such co-ownership strategy with your estate planning attorney before deciding on a course of action.
Contact Owings Mills Estate Planning Attorney
For more information, please contact our estate planning office in Owings Mills, Maryland by calling 410-654-3850 to schedule an appointment.