Prepared By Steven Samson, Attorney At Law
Joint tenancy with right of survivorship is a form of shared ownership, with the key words being the "right of survivorship." When one owner dies, that person’s share immediately passes to the other owners in equal shares, without going through probate. This means that while the joint tenants equally share ownership during their lifetimes, when one joint tenant dies, his or her interest ends. The title that was held by the deceased person passes automatically to the surviving joint owners, not to the heirs of the deceased person or their relatives or persons named in his or her Will or Trust. The right of survivorship continues until the sole survivor owns all of the property.
People put their property, whether real or personal, in joint tenancy with others for many reasons. The main reason given is to avoid probate after their death. Also, personal representative fees and court costs may be avoided. Legal costs are generally reduced as well. As we will see, so many bad things can happen when someone puts their property into joint tenancy that I do not recommend it as an estate planning tool.
Creditors and Debts:
Property that is owned in joint tenancy is subject to being attached by the creditors of either joint owner. I often find that a parent has named one of their children as a joint owner of a bank account or other property. They usually do this for convenience purposes to either avoid probate or to enable one of the children to access the money if the parent needs it. Most people do not realize that the child's creditors can attach this property regardless of whether the child contributed any part of the joint property. A creditor could then force a sale of the property to satisfy the debt.
There are other financial implications. If a joint tenant fails to pay income taxes, the IRS can place a tax lien on the property. If a joint tenant files for bankruptcy, the bankruptcy trustee can sell that person's interest in the property. If either party has a judgment entered against him, such as from a car accident or bad business dealings, the holder of the judgment can execute the judgment against the property.
Unintended Estate Planning Consequences:
Placing property in joint tenancy may disinherit children or others since property held in joint tenancy passes to the survivor regardless of what the deceased joint tenant's Will or Trust directs and regardless of whom the decedent's heirs are under law. Usually it is a person’s intent to leave their property to their spouse and then to their children. Joint tenancy provides no means of ensuring this. For example, if one spouse died the other could choose to disinherit some or all of their children.
Many second marriages have children from the first marriages. In this case, if property is held in joint tenancy, when the first spouse of the second marriage dies the current spouse becomes the sole owner of the property. When that spouse dies his or her children get the property, the other spouse’s children get nothing.
Other examples show how dangerous joint tenancy can be. Consider a widow with three daughters. Each of the daughters has one child. In an attempt to leave her estate equally to her three daughters and their children, the widow places a property in joint tenancy with all three of her daughters. Prior to the widow’s death, one of the daughters dies. Upon the death of the widow, the two daughters each own the property equally. The child of the deceased daughter receives nothing from her grandmother.
Two sisters, Jane and Joan, own property as joint tenants with right of survivorship. If Jane dies, Joan receives Jane’s interest. Jane’s husband and children do not inherit, even if Jane left a Will or Trust stating her property was to go to her husband and children.
A mother places the title to her farm in joint tenancy with her son. She tells her son to share the property with his sister. After the mother dies, the son has a legal right not to share the property with his sister.
Adverse Estate Tax Consequences:
As an individual, each person is allowed a credit against estate taxes which currently shelters $2,000,000. Many people mistakenly believe that their estates are not that large because they fail to consider their life insurance and retirement plans, both of which are includible in their taxable estates. If a person’s estate exceeds $2,000,000 and they are married, they can avoid or lessen estate taxes with credit shelter planning. This planning preserves each spouse’s credit against estate taxes. A couple cannot maintain both federal estate tax exemptions if they hold their property in Joint Tenancy. When one spouse dies, the other receives the other's share of the estate. If the estate is over $2,000,000, there is no proper way to maintain the deceased's exemption, thus "throwing it away."
Adverse Gift Tax Consequences:
Both the creation and the termination of a joint tenancy can have gift tax consequences. When someone places a non-spouse, such as a child, on their property as a joint tenant, they make an immediate gift of one-half the value of the property. For example, if a father retitles his $500,000 home in joint tenancy with his daughter, he has just given his daughter a $250,000 gift. The first $12,000 (gift tax exclusion) is tax free. But the father is liable for gift taxes, if any, on the rest.
The termination of a joint tenancy will result in a taxable gift if the property or proceeds from its sale are not divided in accordance with the joint tenants' interests. In our example, if the daughter had said, "Dad, sell the house and keep all the money" the daughter would have made a gift to her father of her interest in the property. Often, an older parent designates a son or daughter as a joint tenant on bank accounts with the intent that the child divides the proceeds with the other children after the parent dies. If the child shares the inheritance, he or she has made a gift and there may be gift tax consequences.
Loss of Control:
One of the most drastic consequences of placing property in joint tenancy with another person is the loss of control over the property. Once ownership is transferred, the new co-owner effectively holds power over the property. The original owner cannot cancel the transfer if he changes his or her mind. The co-owner can transfer his interest to others without the consent of the original owner and worse yet, might not consent to a transfer of the entire asset if desired by the original owner. The original owner would not be able to sell or mortgage the property unless the co-owner also agrees and signs.
For example, a widow owns her home outright. Thinking that she would save probate costs upon her death, she places the property in joint tenancy with her son. Now, she wants to remarry, sell the home, and move to California. The son, not wanting his mother to remarry and move away, refuses to sell.
Any co-owner can sever his interest and change its nature into a "tenancy-in-common" so that the survivorship feature will not take effect. Under tenancy-in-common, one owner may sell or give their interest at any time during life or at death. He can do this even against the wishes of the other joint tenants.
What is worse is if a joint owner becomes physically or mentally incapacitated and can no longer take care of his or her financial affairs. At that point it may be necessary for the probate court to conduct a guardianship or conservatorship proceeding so the joint asset can be managed or sold. The property can be tied up for months when cash is desperately needed.
Revocable “Living” Trusts are a Better Alternative:
The issues discussed above are just a few of the problems people face with joint tenancy. One should not presume that joint tenancy is a simple and inexpensive estate planning solution. The Revocable “Living” Trust is a better solution because it protects a person’s estate from their children's creditors, it allows a person to avoid probate, and it preserves both a couple’s federal gift and estate tax exemptions.
The Revocable “Living” Trust also gives greater control and flexibility. If a person later changes their mind and wants to leave all or part of their property to others or if they want to exclude one of their children from inheriting, they will be able to do so. They will also be able to insure that their children inherit property even if their spouse remarries. If they decide to sell their property they can do so without any one else’s consent. Finally, a Revocable “Living” Trust avoids the necessity of a probate proceeding if the person becomes physically or mentally incapacitated because the successor trustee takes over without court intervention.