In the context of estate planning, 50-50 homeownership between siblings refers to a situation where two siblings jointly own a property in equal shares. This type of ownership can arise in several ways, often as a result of inheritance. Understanding the legal implications and options available in such a scenario is important for effective estate planning and conflict resolution.
Ownership
Equal ownership can lead to disagreements on property management, expenses, or the sale of the property. It is crucial to have clear communication and possibly a written agreement outlining decision-making processes. Each sibling generally has the right to sell or encumber their share, but the process and implications can differ based on the form of ownership and state laws. If the property is held as “Tenants in common”, each sibling owns a 50% share independently, which can be sold separately without needing the other sibling. In “joint tenancy”, the property automatically passes to the surviving sibling upon the death of the other.
Partition Actions
If siblings cannot agree on the property’s management or disposition, one may seek a court-ordered partition. This can result in the property being physically divided or sold with proceeds distributed. A partition lawsuit (or a partition action) is a legal process in which the court either divides up a property among the co-owners or sells the property and divides the money among the co-owners. If possible, the court will divide the property into equal pieces and give each sibling a piece. However, this sort of literal division often only occurs with land, acreage, or rural property that can be doled out in equal pieces. Courts cannot literally split a residential property, for the obvious reason depicted above. If the Court cannot divide the property itself, then it must be sold at a sheriff’s auction with the purchase price divided among the owners. For example, if each person owns 50%, each person receives 50% of the money when the property sells.
Estate and Gift Tax Considerations
For federal estate tax planning, the value of a sibling’s share in the property will be included in their estate for estate tax purposes upon their death. If the property value exceeds the federal estate tax exemption amount, there may be tax implications. Additionally, any transfer of property interest between siblings may be subject to gift tax regulations.
Asset Protection & Creditors
It is important to know that 50-50 ownership means that the property is exposed to both sibling’s creditors. For example, if one of the siblings were to get divorced, file for bankruptcy, get into a car accident, etc., their interest in that shared property would be subject to the divorcing spouse/creditor, which can make a messy situation. Establishing an irrevocable trust can be an effective way to protect assets. Once assets are transferred into such a trust, they generally aren’t considered part of your personal estate and are thus shielded from creditors. However, this depends on state laws and the specific design of the trust.
Importance of Estate Planning for Parents
Parents who plan to leave property jointly to their children should consider the importance of estate planning. When multiple unmarried individuals plan to hold property together, using a Limited Liability Company (LLC) can be an effective approach. An LLC provides personal liability protection to its members. This means that the personal assets of the members are generally protected from any debts or legal claims against the LLC. An LLC can facilitate easier transfer of ownership shares compared to direct property ownership. This can be beneficial in estate planning and in scenarios where a member wants to exit the investment.
Conclusion
These scenarios can be complex. For a thorough understanding of these principles in specific cases, contact our team at Legacy Counsellors to discuss your options. Email us at info@legacycounsellors.com or call us at 413-527-0517.