Legal Tip 334: Asset Protection and Holding Property as Joint Tenants

Some say that holding assets jointly as Joint Tenants is the same in terms of asset protection as holding those assets as Tenants in Common in equal shares. This is because if one joint tenant owner becomes bankrupt the joint tenancy will immediately be severed and the joint tenants will now be equal owners as tenants in common.



Example

Homer and Marge own their main residence as joint tenants. They did this as an asset protection mechanism to reduce the chances of Homer’s share of the property passing to his children from other relationships.

Home becomes Bankrupt. That means Homer and Marge are now 50/50 owns as Tenants in Common.

Homer’s trustee in bankruptcy takes the 50% and then offers Marge the chance to buy out the share of her bankruptcy husband. Marge borrows some money from the bank and pays the trustee in bankruptcy and they get to keep the house.

Had they been tenants in common there would have been no difference really.



But there is an asset protection difference where there is a death just become the bankruptcy of the other owner.



Example 2

Homer and Marge are joint tenant owners. The stress of the Homer’s cancer has causes Marge’s business to fail. Creditors are hovering like vultures. They are just about to bankrupt Marge when they hear about Homer’s illness. So they decide to wait.

Homer dies and Marge becomes the sole owner of the house, authomatically under the right to survivorship of the joint tenantcy.

They then bankrupt Marge and get the whole house and not just Marge’s 50%.

But, on Homer’s death bed his severed the joint tenancy and did all that was necessary to transfer the title, which just wasn’t registered yet.

He also changed his will and left his share of the property to his children instead of Marge. The creditors are disappointed once they realise that they only get 50% of the $800,000 house – which is not enough to pay out Marge’s debts so she still becomes bankrupt but the kids are $400,000 richer.





Make sure you factor in insolvency and death happening in close proximity when considering whether to get Joint Tenants or Tenants in Common on your next purchase.