By Christopher J. Godfrey
Do you own property as a joint tenant? Have you considered the planning pitfalls of this way of owning property? Ownership as joint tenants is so pervasive that we don’t look at its downsides.
In joint tenancy, each person owns the entire asset, not a part of the asset. This legal fiction of two or more people owning 100 percent of the same asset is derived from the full name given to joint tenancy: joint tenancy with right of survivorship. “Right of survivorship” means that whoever dies last owns the property. The previous joint tenants merely had the use of the property while they were alive.
Joint tenancy property is “uncontrollable.” Even if a joint tenant intends to have his or her share pass to loved ones, the property is not controlled by the instruction in the joint tenant’s will or trust. Joint tenancy automatically passes to its surviving owners by operation of law.
Property that is owned in joint tenancy can be a trap because the term itself has nice connotations. It implies “the two of us,” a partnership, a marriage of title as well as love. On the surface, at least, it appears to be the right way for people who care for each other to own property. It’s psychologically pleasing, which for many people is the real advantage of owning their property jointly.
As with other things with latent problems, joint tenancy is easy and convenient. Odds are that when you were married (if you are), one of the first financial actions you and your spouse took was to open a checking or savings account. The clerk who helped set up your account put it in your joint names when you answered yes to the question, “Both names on the account?”
The same is true of your first house or your first car. It seems that all of those involved (primarily clerks and salespeople) took control of your planning and titled your property in joint tenancy, whether or not they knew what they were doing,
For most people, the disadvantages of joint tenancy far exceed any advantages. Here are some of the more devastating pitfalls of joint tenancy:
1. There is no control, and property may pass to unintended heirs.
2. There are no planning opportunities.
3. For married couples, probate is at best delayed, not totally avoided.
4. For non-spousal owners, unintentional gift taxes and death taxes can be generated.
Let us take a look at each of these potential pitfalls in more detail.
(1) There is no control, and property may pass to unintended heirs.
Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do. If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you. Joint tenancy provides no means of ensuring that your property will pass to whom you want. For example, if your spouse remarries, your children may inadvertently be disinherited. Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death.
If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your property. A joint tenant who dies is presumed to own 100 percent of the property. As a result, the deceased tenant’s family must pay all of the death taxes even though the property passes to the surviving tenant. Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn’t even own.
(2) There are no planning opportunities.
What if your spouse or your children need assistance in managing the property you left them? Joint tenancy cannot help. What if you want to leave instructions for your loved ones as to how, when, and why your property is to be used? Joint tenancy offers no opportunity for instructions of any kind.
If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own or your loved ones’ care. If your spouse is disabled when you die, the probate court will “inherit” the joint tenancy property and determine how and when it is to be used for your spouse’s benefit.
(3) Probate is at best delayed, not totally avoided.
With married couples, joint tenancy does not avoid probate – it only delays it. Because joint tenancy passes outside all will or trust planning, it does avoid probate – on the death of the first spouse. When the second spouse dies, however, there will be a probate. In situations where both spouses die together, there will be at least one probate and perhaps two.
(4) For non-spousal owners, unintentional gift taxes and death taxes can be generated.
When non-spouses create joint tenancy, they often create a gift tax as well. Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property. The moment this isdone, the transfer of property is often considered by the IRS to be a gift, and if valued above $14,000 (in 2013) it will have to be reported to the IRS. In some cases, a gift tax may be immediately due.
When a non-spouse joint tenant dies, the surviving tenant gets the property. If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent’s will or trust says. The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax.
For many, the solution to all of these concerns is the creation of revocable living trusts, and the transfer of title to trust ownership rather than joint tenancy.
