by JOHN REILLY Attorney-at-Law Written for "The Hawaiian Realtor" Magazine

The transaction is almost complete. The broker has found a ready, willing, and able buyer at the listing terms. All the provisions of the standard DROA are determined and all protective special conditions have been inserted. Just one more puka to fill in...TITLE SHALL VEST AS FOLLOWS...suddenly an impass. The buyer says "I don't know too much about tenancies but I do know that I want my darling Susan to get this house when I die." The broker recommends that the husband and wife take title as tenants by the entirety since this will achieve the desired result of the surviving spouse obtaining title to the entire property immediately upon the other's death. With no further discussion of the consequences of this act, the buyer directs the broker to fill in the puka with the words "tenancy by the entirety."

There are two major problems in the above situation. First, a broker who recommends how a buyer should hold title to property may be guilty of the unauthorized practice of law. The broker does have a responsibility to advise the buyer of the principal features of the various forms of ownership. Beyond that, however, the broker can only recommend that the buyer consult an experienced tax advisor, such as an attorney or accountant. Second, in a great many cases, holding title jointly can create consequential tax disadvantages which could be avoided with proper tax counselling and estate planning.

FORMS OF OWNERSHIP

Ownership of real property by an individual may be in the form of sole ownership or, when two or more individuals are involved, in the form of tenancy in common, joint tenancy, or tenancy by the entirety. Ownership in the name of a corporation, trust, or partnership is beyond the scope of this article. Some of the principal features of these individual forms of ownership are:

TENANCY BY THE SEVERALTY

Sole ownership, which is severed from anyone else's ownership. Any person can hold title to property in his individual name. The broker should indicate in the DROA the marital status of the individual as this information is needed by the attorney preparing the conveyance documents.

TENANCY IN COMMON

A form of concurrent ownership of property among two or more persons in which each has an undivided interest in the whole property. Each owner holds an estate in land by separate and distinct titles but with a unity of possession. Tenancy in common interests need not be equal, i.e., one party may own one-tenth, another four-tenths, and a third party may own the remaining five-tenths. Unlike joint tenancy, there is no right of survivorship. Therefore, upon the death of one of the co-tenants, his interest is subject to probate and passes to his heirs or devisees (beneficiaries under a will) and not to the surviving co-tenants. Tenancy in common is usually used where two or more investors pool their investment or where two or more persons succeed to ownership of property by will or inheritance.

JOINT TENANCY

A form of ownership of property by two or more persons which is created with the same unity of time, interest, title, and possession. The co-tenants hold title as if they collectively constituted one person; sort of a fictitious unity. For the purposes of transfer, however, each is considered to own an equal share. The distinctive feature of the joint tenancy is the "right of survivorship" by which the surviving joint tenant(s) hold title to the property free from the claims of the heirs and creditors of the deceased joint tenant. When there are two joint tenants and one dies, the survivor takes no new title but, rather, holds the entire estate under the original grant of title. When there are more than two joint tenants and one dies, the survivors now own the property in equal undivided interests. No probate proceedings are necessary to transfer title. The survivor should, as a matter of good title practice, record an affidavit of death and a death certificate in the Bureau of Conveyances. If the property is registered in Land Court, the Certificate of Title must be amended to reflect the fact of death. When the last surviving joint tenant dies, the property passes to his heirs or devisees upon the probate of his estate.

A joint tenancy may be severed or terminated by the conveyance of a joint tenant's interest to another. The transfer might be either voluntary or by operation of law, as where a judgment creditor causes a joint tenant's interest to be sold under execution. In that case, the original joint tenant and the creditor are now tenants in common. Thus, a person who decides to hold title in joint tenancy in order to avoid writing a will may later find it necessary to write a will if the joint tenancy is severed and he thus has a tenancy in common interest that he wants to leave to a certain person.

TENANCY BY THE ENTIRETY

A form of joint tenancy between a lawfully married husband and wife which places all title into the marital unit. Both spouses have an equal undivided interest in the whole property with the survivor obtaining complete title free and clear of the claims of heirs and creditors of the deceased spouse. The main difference from a joint tenancy is that neither spouse can convey his or her interest nor force a partition of the property without the other's consent. This type of tenancy is frequently used in the ownership of a family residence since it assures that the survivor will have a home regardless of whether a will is drawn or the property is fraudulently conveyed by one spouse. The tenancy by the entirety may only be severed by divorce or by joint conveyance. When divorce severs the tenancy, the parties become tenants in common. The creditor of one spouse cannot force a sale of one-half of the property to satisfy a judgment against that spouse. A creditor of both spouses could, however, take legal action in an appropriate case to force a sale of the property to satisfy a joint obligation. For this reason, most lenders require the spouse to co-sign a promissory note by the other spouse.

RIGHTS AMONG CO-TENANTS

The principal rights and obligations among co-tenants are:

1. No one co-tenant can claim possession to any specific portion of the property. Each may occupy the whole or any part but cannot exclude another co-tenant from occupancy or charge rent for another co-tenant's use of the land. Each co-tenant can retain the profits derived from his own use of the property but must share net rents received from third parties.

2. A co-tenant who pays the taxes or other liens (e.g., mortgage) against the property is entitled to a pro-rata contribution from the other co-tenants. The paying party has an equitable lien on their respective shares until this contribution is paid.

3. A co-tenant who makes repairs to the property after the others have refused to repair is entitled to contribution. This right to contribution does not usually apply in case of permanent improvements made by one co-tenant without the consent of the other co-tenants.

4. The interest of a co-tenant may be transferred voluntarily (mortgage, deed) or by operation of law (creditor's execution).

5. In transferring the entire property, each co-tenant must sign the conveyance. Usually, each one signs the same document, though it is permissible to use separate conveyance documents for each co-tenant.

6. A confidential relationship exists among co-tenants.

7. At any time a co-tenant can petition a court to partition the property and thus force a sale or division of the property.

COMBINATION OF TENANCIES

When title is transferred to multiple grantees, there are many possible variations of title ownership. For example, assume a mother and father decide to buy a home with their young daughter and son-in-law. Title might be held as follows: "...to George Dumphy and Ima Dumphy, husband and wife, as joint tenants, an undivided one-third interest and Hank Hammer and Ginny Hammer, husband and wife, as tenants in common, an undivided two-thirds interest in Lot 123 as more particularly described..."

TAX COMMENT ON JOINT TENANCY

A common misconception about holding title in joint tenancy (including tenancy by the entirety) is the avoidance of paying certain kinds of taxes. Quite the contrary, a joint tenant is fully subject to the payment of gift taxes, income taxes and Federal estate and Hawaii inheritance taxes. When one of the joint tenants contributes more than his pro-rata share to acquire the property, there is a taxable gift to the other joint tenant. When the joint tenants are husband and wife, the payment of the gift tax may be deferred until the tenancy is terminated otherwise than by death. There are, however, certain federal gift tax exclusions. When property is held in joint tenancy, each joint tenant must report his pro-rata share of the gross income derived from the property whether or not actually received by him. He can also deduct his pro-rata share of any available depreciation deduction.

By far the most serious tax consequence of joint tenancy ownership is the potential substantial tax burden at the time of a joint tenant's death. Even though the property passes outside of probate, the value of the property is included in the decedent's estate for Federal estate tax purposes. In fact, the estate tax is applied to the entire value of all jointly held property except to the extent the surviving joint tenant can produce clear and detailed records proving his contribution. Most people neglect to keep these required records and thus subject the entire property to the tax. The property is then taxed again upon the death of the survivor. The Federal tax rates are quite high and can result in substantial taxes on estates. Jointly held property is also subject to the Hawaii inheritance tax except that only half the property is taxed if husband and wife are joint tenants.

CONCLUSION

With proper estate and tax planning, significant tax savings can be obtained. Among the tools of the estate planner to minimize taxes are the creation of a life estate in the wife with the remainder interest to the children, establishment of living trusts and testamentary trusts, and others. Holding title in joint tenancy or tenancy by the entirety would preclude the effective use of these tax-saving devices. Especially in situations where the buyer owns several properties or has many assets, the broker should recommend that the buyer discuss the tax aspects of the transaction with competent counsel. In order to complete the purchase agreement, however, it is not necessary that the buyer wait until consulting tax counsel. The buyer could indicate on the DROA that the form of tenancy shall be "determined later." Of course, the buyer should thereafter quickly make his choice of tenancy and immediately apprise escrow of his informed decision.

The preceding articles provided by Pitluck Kido Sato & Stone.