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What are the dangers of owning assets as tenants-in-common?

Each co-owner in a tenancy-in-common or tenant-in-common own a divided fractional share of the property. This creates serious lawsuit dangers and, reciprocally, no creditor protection. There are many examples to illustrate the risks of tenants-in-common. For instance, if you and your friend John are tenants-in-common and own an apartment building, each of you can sell, gift, or mortgage your half interest in the building without the consent of the other. You are thus essentially 'partners' in the business of renting apartments, collecting rents, maintaining the premises, etc., and the building provides you an income. Perhaps someday you expect to sell the building for a hefty profit.

Since you and John are tenants-in-common, you each own a separate share in the building which is distinct from the interests of the other tenants-in-common. Your personal creditors cannot claim your co-owner's interest and, conversely, if John is sued for reasons unrelated to the building, John's creditors can only claim his half interest in the building. Your half remains safe from John's creditors. While this may seem acceptable, particularly if you see yourself as the safe co-owner, a tenancy-in-common can nevertheless cause problems.

One big risk is that your co-owner's creditors can force a sale of the entire property to satisfy your co-owner's personal debts. Since your co-tenant, John, can transfer his share of the tenancy-in-common property without your consent, John's creditor can 'step into his shoes' and similarly sell his interest. You may possibly negotiate to buy your co-owner's interest to avoid the forced sale of the entire property, but this is not always practical; you may not have the money. Should the court force the sale of the entire property, you will nevertheless lose the property, although you will recover your half share of the net proceeds from the forced sale.

Suppose John's creditors do not force the sale of the entire property but instead successfully bid for John's half interest in the property. You now have a new partner – John's creditor! It can and does happen. You can see that John's financial problems can cause you serious problems, and your problems can become John's headache. More importantly, how safe is your ownership interest from your own creditors when you own property as tenants-in-common? You already know the answer: If John's creditors can seize his interest, your creditors can seize yours.

This is why co-owning property as tenants-in-common is too risky. If you or your co-owner has financial problems, you can easily lose control of the property or you might lose significant money. Avoid this trap. We will later tell you about many better ways to co-own assets through various protective entities. If you insist upon titling assets as tenants-in-common, then make certain that your co-tenants are financially secure; otherwise you risk a forced sale, a new co-owner or lost control of your investment.

Aside from the vulnerability of your co-ownership interest, perhaps an even bigger pitfall is that tenancy-in-common expands your liability. If John accidentally injures somebody through his negligent management of the co-owned property, who gets sued? Both you and John, of course. Since you co-own the property, you essentially created a general partnership. Should the plaintiff win a $5 million judgment or any amount that exceeds what the property or John is personally worth – who pays? You, of course. As co-owners, you and John have joint and several liability for any liability that arises from co-ownership of the property. The bottom line is never to own property directly as tenants-in-common. Co-own the asset indirectly through a protective entity.

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The Presser Law Firm, P.A. - Asset Protection Attorney
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