When a person owns real estate, whether it is their home or an investment property, (“property”) in their sole name they are free to dispose of their interest in the property on their death by their Will to whoever they wish.

This freedom is subject to any agreements which the owner may have entered into during their life in relation to the property, including a mortgage.

When two or more people own a property as joint tenants, the law provides that:

  • each joint tenant has the same interest in the property; and
  • upon the death of one joint tenant the property automatically passes to the other joint tenants who thereafter continue to own the property as joint tenants. It does not pass under the Will of the deceased joint tenant. If there are two joint tenants, on the death of one, the surviving joint tenant will own the property alone.

When people own a property as tenants-in-common they can own the property in equal or unequal shares. Upon the death of one owner their share of the property does pass under their Will.

It is possible to change the “tenancy” ownership of a property from joint tenants to tenants-in-common, and vice versa. The way in which a property is owned has significance in relation to the owner’s estate planning objectives.

Gift of interest in property

The sole owner of a property, or the owner of an interest in a property as a tenant-in-common is able to leave their interest in a property by their Will to one of more people as an absolute gift or in a trust structure.

  • If it is an absolute gift, the beneficiary has the same interest in the property as the Will-maker.
  • If a trust is used, the trust may be structured to take account of the will-maker’s wishes.

A trust is often used when a will-maker wants to achieve the following:

  • The surviving spouse can be given an option to inherit the deceased’s share absolutely (without a trust) or via a trust.
  • If the surviving spouse decides to use the trust structure, it can be used to minimise future income and capital gains tax.

Case study – Janice and Ian

Ian and Janice are aged in their early sixties and have two adult children and five young grandchildren. They own their own home and have two investment properties. All properties are owned as joint tenants.

The two investment properties provide a good level of income which is shared equally between Ian and Janice. They recently met with a close friend (Jane) who had recently lost her husband (Ray). Jane and Ray also owned two investment properties. As they were owned as joint tenants Jane now receives all the income which has placed her in a higher tax bracket, and Jane has been told that if she were to sell one of the properties, the capital gain would be taxed in her name, again increasing the level of tax. Jane was advised after Ray’s death that they could have minimised future tax by changing their ownership to tenants in common in equal shares and having a sophisticated Will with testamentary trusts. However, it was now too late as Ray had died.

Following discussions with their accountant and lawyer, Ian and Janice decided to change their ownership of the investment properties to tenants-in-common in equal shares and then in their respective wills they gave each other the option of inheriting the deceased’s half absolutely, or via a testamentary discretionary trust.

By structuring their ownership and Wills in this way, they were able to ensure the survivor could legally minimise future tax on the rental income or capital gain.

Article authored by Julia Monahan, Estate Planning Lawyer, HLB Mann Judd Sydney.