Property rules that ensure continuity without conflict

As one makes headway in life, it follows that they embark on establishing themselves through acquiring assets and property.

These assets could be in any form, ranging from purchasing real estate and establishing companies, to acquiring land and business enterprises.

However, many property investors place more focus on the acquisition of these assets and ensuring their security and continuity, hardly paying enough attention to the in-depth intrigues and necessity for correctly designating and titling their acquired assets, as well as defining how these are owned, and the consequent implications that may arise from some of these disregarded lapses.

In due course, sometimes unanticipated challenges arise, when one owns property not well titled with clear ownership details and parameters put in place.

These challenges, time and again create conflict within a group or family setting, especially when it comes to inheritance in case of demise of a property owner, or when one wishes to confer their interests to another.

These could be in terms of, when need arises, who gets which assets, why they should get it, how much of the entire property one is entitled to, or what share of the property one holds as theirs.

Sometimes the property’s owner/s or tenants also surpasses the provisions they make in their wills, which could lead to the beneficiaries differing. Tax benefits can also be gained or lost, depending on how one titles their property.

While there may be a number of different ownership arrangements, property experts point out that in Kenya, there are some which are most common.

In order to avoid complications that come with some of these forms of ownership, the property experts suggest that it is always necessary for one to be conversant with the available options of property ownership arrangements.

Joint tenancy

“This arises when there is ownership of an undivided interest in property by two or more owners, each with a right of survivorship. If one joint tenant dies, their shares or interests are passed on to the surviving joint tenants,” says Mr Felix Onyango, a real estate consultant and the CEO of Dominion Valuers Ltd, a Nairobi-based real-estate firm.

As might be obviously thought, joint tenancy is not only limited to married spouses, as anyone can share joint interests in assets.

“However, in Kenya, joint tenancy is, by law, mostly recommended for married couples as it eliminates chances of disinheriting one’s kin, when one passes away,” says Jessica Mwenje, a real estate lawyer and partner at MMC Africa Law.

There is also a tax benefit when this arrangement is done between a husband and wife because when the property is owned by two married individuals, the value of a deceased spouse’s property passes to the surviving spouse without neither a probate nor any tax implications.

A probate in this case is the legal process in which a will is reviewed to determine whether it is valid and authentic. It also refers to the process of general administration of a deceased person's will or the estate of a deceased person without a will.

In joint tenancy, a joint property interest is usually not passed to the other individual through documents such as wills or a trusts, if one of the co-owners passes away, then the assets’ ownership interest automatically passes directly to the surviving holder, according to Ms Mwenje.

On the other hand, in case the co-owners are not married, the entire value of the assets, such as real estate, is put in the deceased’s share of the property. The property must then go through a probate so that the surviving owner in the joint tenancy is certified to take ownership.

This usually catches the people involved unawares and hence the more reason why one needs to be acquainted with the different forms of asset ownership.

Property experts advise that if one is not married to the person with whom they plan to share an asset, then a joint tenancy form of ownership is not the best option to consider.

Joint Tenancy with Rights of Survivorship (JTWROS)

This form of property ownership is, in some way, similar to the joint tenancy form of asset proprietorship. In this case, joint tenants also have exclusive undivided rights to ownership of the property.

It also has survivorship rights and when one of the partners dies, their share of the property passes automatically to the surviving owners. Survivorship rights in this case eliminate probate. “When still alive, one of the joint tenants can also transfer their shares to another person not among the co-owners,” says Ms Mwenje.

Under joint tenancy with rights of survivorship, when a parent, for instance, gives real estate to his three children, then one of the three children dies, his share of inheritance is automatically transferred to the ownership of the two remaining (siblings), and not to the deceased’s children.

This form of arrangement effectively disinherits the deceased’s heirs from the said property. If another of the two remaining siblings also passes away, the real estate remains in the sole ownership of the remaining sibling. The process of transferring ownership shares does not pass through probate.

At the death of the last surviving sibling however, a probate will be needed to pass title of ownership to his designated heir. There are however some tax measures in this form of ownership such that when the surviving owners sell the property, they will have capital gains on their shares.

If also, for instance, one of the owners transfers their interest to someone else other than the co-owners, the recipient of the interest does not become a joint tenant with survivorship rights but rather a tenant in common with the other owners.

This arrangement is most commonly used in family settings where parents sometimes name their children as joint tenants with right of survivorship. This, they do with an intent that the property remains in the family upon their deaths.

It eliminates the need to probate the property in each child’s share and keeps it within the family line, benefiting the last surviving children.

Tenancy in common

Tenancy in common property ownership involves undivided ownership interest in property between two or more people. But then, unlike other forms of joint ownership, these shares can be owned in different proportions and not necessarily equally.

“A tenant in common can pass their share to anyone they wish, through traditional documentation such as a will,” says Ms Mwenje.

However, by law, this interest does not pass on to the other co-owners in the arrangement. It essentially is a form of co-ownership with no survivorship rights for the co-owners, according to Ms Mwenje.

If three individuals, for instance, own a business enterprise as tenants in common and one of them dies, the deceased’s ownership interest does not automatically pass on to the remaining two.

The deceased’s interests first go through a probate, which could cause challenges if the remaining owners wish to sell their enterprise, as they will not be able to do it until the completion of the probate process.

Completion of the probate is followed by addressing the issue of the tax incentives. These incentives however go to the heirs, who receive their share of the property at a step-up in basis of the prevailing market value.

It is a good choice for ownership when the parties involved do not want the surviving co-owners to inherit a deceased’s interest, but rather, a predesignated heir.

“A downside to this arrangement is that since it is easy for other tenants or owners to transfer their interests, this may allow for introduction of other new owners who might be at variance with the initial owners or tenants in the partnership,” Mr Onyango says.

It ensures each owner’s interest passes to other successors instead of the surviving co-owners. Sometimes a probate may be required to transfer these interests to the heirs.

The probate can however be avoided through using transfer-on-death deeds, life estate deeds, lady bird deeds which gives one continued control over the property until their death, upon which the property is automatically transferred a new owner without the need for probate, and a deed of trust, which is a mutual agreement between the co-owners that if one of them passes away, their share of the property is passed on to a designated heir, without any complications.

Community ownership of property

In a community property set-up, any assets acquired after the onset of a marriage are not owned solely by either of the spouses, but rather considered belonging to the ‘community’ of the marriage, and as such, each of the spouses owns an equal share.

The spouses can choose to leave their share of the assets to their designated heirs upon death, without restrictions on how they do this. There is also no law requiring one to leave their share of the property to the surviving partner in the arrangement.
An instance could be that of a divorcee who has remarried, and acquired community property with the new wife. When he dies, he may decide to leave his share of the property to his ex-wife.
If the divorcee, now in a new marriage, is still alive, he cannot transfer his interest in assets they acquired and jointly hold with his new wife, to his family from a previous marriage.
He can, however, declare in a will to have his interests transferred to his children when he dies. In this case, the new partner with whom he holds joint community ownership can hardly prevent this.

The beneficiary of the interests, who is chosen by the deceased before they die, also receives a step-up in basis on the portion of the property they receive.

Exceptions in the community property rules include property acquired before a new marriage as this is not counted as community property but rather separate property, and also property acquired by one of the partners in the community, as a gift or inheritance during the marriage.

Sole or individual ownership

Sole or individual ownership of a property occurs when a single individual owns complete interest and shares in the asset.

This ownership is carried from one person to another using transfer documents or by existing succession laws. “The owner holds absolutely ownership in perpetuity and so one can pass the property down their posterity as inheritance without restrictions. One can also uninhibitedly create other lesser interests (leaseholds) from this property,” says Mr Onyango.

If the owner of the property passes away, their interest in the property and assets included therein are passed to a designated heir as indicated in their will.

Land taxes and probate fees could however be incurred in the process if no prior planning had been done.

A positive in this form of property ownership is that the recipient of the property receives a full step-up in basis value of the property.

There will thus be no capital gain to worry about if they sell the property because they receive the property at prevailing market value.