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Making Cents: Sharing ownership can backfire

John P. Napolitano

Joint ownership may be appropriate for married couples, but for other people, it may create more problems than it's worth.

Let's start by defining the two most common forms of joint ownership.

Tenants in common means that each owner has an undivided ownership interest in the property, whether it is a baseball card collection, a bank account or real estate. So if you are a tenant in common in a two-family house, you can sell your half whenever you want to whomever you want. When you die, that half of the property will pass to whoever is named in your will.

The other type of joint ownership is called joint tenants with rights of survivorship. This does not offer an undivided ownership interest; instead, each tenant effectively owns the entire asset. It is an ownership interest that is limited in terms of the rights of the owners.

For example, if you own a two-family house with your brother as tenants with rights of survivorship, and one of you dies, the decedent's half of the property goes to the surviving owner - regardless of what the decedent's will says.

Other problems with joint ownership include asset protection and flexibility.

Consider this scenario: Your brother is involved in financial difficulty or litigation. If he receives outstanding judgments from creditors, any asset that he owns may be subject to the claims of those creditors. That may include your two-family house. If you are selling that house, your brother's creditors can place a lien on the property, and that lien must be satisfied before the title can pass to the buyers.

A similar situation could develop if both owners are named on a loan against the property and one of the owners is suddenly unable to carry his share of the debt. The mortgage holder doesn't care that you paid your half; they need the whole payment and consider you equally delinquent – even though in your mind you aren't delinquent at all.

The solution: Don't own property jointly with anyone but your spouse. That doesn't mean that having partners is a bad idea. It simply means that a little care needs to go into the form of ownership. I suggest forming a limited liability company, partnership or corporation to own the property.

See a qualified lawyer and get the situation fixed before something ugly happens.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com. For online discussion and more information, go to www.makingcentsblog.com.