Understanding Tenants in Common: A Guide to Shared Ownership

Highlights: 

• Tenants in common allows multiple individuals to own a proportional share of an account or property. 
• Each owner's share can be passed on to heirs, making it part of their estate. 
• If one co-owner dies, their heirs are entitled to the deceased’s portion, rather than the share transferring to the other co-owners. 

When multiple individuals share ownership of a property, asset, or financial account, one of the most common arrangements is tenants in common. This legal concept allows two or more people to own a property or asset in specific proportions, and each co-owner has the right to transfer or bequeath their share as they see fit. Unlike joint tenancy, where rights of survivorship dictate how ownership is transferred after one owner’s death, tenants in common offer flexibility and allow each individual to maintain control over their share of the asset. This arrangement is used in various settings, from real estate to investment accounts, and carries distinct legal and financial implications. 

What is Tenants in Common? 

In a tenants in common arrangement, two or more individuals or entities hold ownership of an asset or property. Each tenant, or co-owner, holds a specific, potentially unequal share of the asset. Unlike other forms of joint ownership, such as joint tenancy, the share of each owner in a tenants in common agreement can be distinctly allocated and passed down according to their wishes, typically through inheritance. This means that each tenant’s share is treated as a separate asset in their estate, and they have the ability to transfer or bequeath it to their heirs. 

For example, if three people co-own a property as tenants in common, each could own 25%, 40%, and 35%, or any other combination of shares. If one of the owners dies, their share will pass to their heirs or designated beneficiaries, rather than automatically transferring to the remaining co-owners. 

How Tenants in Common Works 

The tenants in common arrangement operates on the principle that each co-owner has a distinct, transferable interest in the property or account. This shared ownership structure is often applied to real estate, but it can also be used for other assets, such as bank accounts, investment portfolios, or business ownership. The arrangement involves a few key characteristics: 

• Unequal Ownership: Co-owners can own varying percentages of the asset. For example, one person might own 70% of a property, while another owns the remaining 30%, or the division might be more evenly split. 

• Transferability of Ownership: Each tenant has the right to sell, gift, or otherwise transfer their share of the property or asset. This transfer of ownership does not affect the other co-owners unless agreed upon in the co-ownership agreement. Unlike joint tenancy, there are no rights of survivorship to automatically transfer the ownership upon the death of a co-owner. 

• Estate Planning: Each tenant’s share of the property or asset is included in their estate upon their death. This means that the deceased tenant’s portion will be distributed according to their will or the laws of inheritance, depending on whether they have a valid will in place. 

Advantages of Tenants in Common 

The tenants in common arrangement offers several key advantages for individuals seeking shared ownership while maintaining control over their portion of an asset: 

• Flexibility in Ownership Structure: Tenants in common allow for unequal ownership shares, which can be ideal for situations where one person contributes more to the purchase or acquisition of the property or asset. This flexibility makes it an appealing choice for business partners, family members, or investors who wish to divide ownership in proportion to financial contributions or other factors. 

• Estate Planning Control: One of the most significant benefits of tenants in common is the ability to control the distribution of one’s share upon death. Since each co-owner's share is part of their estate, they can decide who inherits their portion of the asset, whether it’s family, friends, or charitable organizations. This control offers a level of security and peace of mind for those involved. 

• Easier to Transfer Ownership: Tenants in common can transfer their share of ownership independently from the other co-owners. This makes it easier to buy out a co-owner or sell a portion of the property without requiring the consent of the other owners. 

• No Right of Survivorship: Unlike joint tenancy, tenants in common do not have the right of survivorship. This can be beneficial in situations where an individual wants their estate to pass to their heirs rather than automatically transferring to the surviving co-owners. 

Disadvantages and Considerations 

While tenants in common offers flexibility, it also presents certain challenges and risks that individuals should consider before entering into this arrangement: 

• Potential for Disagreements: When multiple individuals own an asset together, there is always the possibility of conflicts arising, particularly if the co-owners have different goals, priorities, or management styles. Tenants in common arrangements often require clear agreements about how the property or asset will be used, maintained, and managed to avoid misunderstandings. 

• Estate Complications: While the ability to pass ownership through inheritance can be a benefit, it can also introduce complications. If a co-owner passes away and their share is inherited by multiple heirs, this can result in more owners than initially intended. In some cases, this may complicate decision-making or property management, especially if the heirs do not agree on how the asset should be managed or divided. 

• Exposure to Liability: If one co-owner is sued or faces financial difficulties, the shared asset might be vulnerable to claims. For instance, creditors may be able to claim a co-owner’s share of the property to satisfy debts, even if other tenants are not personally involved in the legal matter. 

• Tax Implications: The transfer of ownership in a tenants in common arrangement may trigger tax consequences, especially if the property or asset appreciates in value. Inheritance taxes, capital gains taxes, or property transfer taxes may apply when shares of the asset change hands. 

Tenants in Common vs. Joint Tenancy 

It’s important to differentiate between tenants in common and joint tenancy, as the two arrangements are often confused. The key differences are: 

• Right of Survivorship: Joint tenancy includes a right of survivorship, meaning that upon the death of one co-owner, their share automatically passes to the surviving co-owners, regardless of the deceased's wishes. In contrast, tenants in common do not include this right, and the deceased's share is passed according to their estate plan or inheritance laws. 

• Ownership Shares: In a joint tenancy, all co-owners have equal shares in the property or asset, whereas tenants in common allows for unequal ownership shares, which can be more flexible based on individual contributions or preferences. 

• Estate Planning: Tenants in common provides greater control over estate planning, as each co-owner’s share is treated as part of their estate. Joint tenants, on the other hand, may not have control over the distribution of their share upon death, as the surviving co-owners automatically inherit it. 

Real-World Applications of Tenants in Common 

• Real Estate: A common example of tenants in common is a group of friends, family members, or investors purchasing a vacation home or rental property together. Each individual may own a portion of the property and can pass their share to their heirs. This arrangement is also often used in commercial real estate investments where multiple investors contribute to the purchase of a property. 

• Investment Accounts: Tenants in common can also apply to brokerage or investment accounts, where multiple people jointly own securities or stocks. Each investor owns a specific percentage of the portfolio, which is part of their estate, and they can direct their share to their heirs. 

• Business Partnerships: In business partnerships, tenants in common can be used to divide ownership of business assets or shares. Each partner’s stake in the business is theirs to pass on, providing more flexibility in structuring the partnership and succession planning. 

Conclusion 

The tenants in common arrangement is a flexible and widely-used ownership structure, ideal for individuals seeking to share assets or property while retaining the ability to control and transfer their portion. Whether it’s real estate, investment accounts, or business ownership, tenants in common allows each co-owner to hold a specific share of the asset, with the ability to pass that share on to their heirs. While the arrangement offers many advantages, including flexibility in ownership and estate planning, it is essential for co-owners to have clear agreements in place to avoid potential disputes and complications. By understanding the structure and implications of tenants in common, individuals can make informed decisions and manage their assets effectively.