Jointly Held Property

There are several reasons to avoid using joint tenancy in your estate plan. You may be held responsible for the other tenant’s actions just because you hold an asset as a joint tenant. For example, if you were to title your automobile jointly with a child who later gets into an accident, you could be named as one of the defendants in a lawsuit relating to the accident. Or you could have an accident with the car and unnecessarily expose your child to a lawsuit because of your own negligence. With joint tenancy you could lose control of bank accounts, stock accounts, mutual funds, annuities, and so on, as either joint owner could access or sell such assets without the permission or knowledge of the other owner. And if one owner has a problem with a creditor or lawsuit, the other owner may lose the asset through garnishment or another court action. Some jointly titled assets, such as real estate, cannot be sold without both owners’ signatures, so a problem arises if one of the owners decides not to sign. The only option may be to file a lawsuit so that the court can partition the asset and then order its sale.

Joint tenancy can also result in an unintended disinheritance. For example, Dick and Barb each have a child and grandchildren from previous marriages. The most valuable asset in their estate is their “dream” lake home. Let’s assume that Dick dies first. As the surviving joint tenant, Barb now owns the entire home and can leave it to her child and grandchildren when she dies and disinherit Dick’s child and grandchildren.

Or suppose Barb, with good intentions, creates a joint tenancy after Dick’s death with her child and Dick’s child, but her child predeceases her, leaving Barb and Dick’s child as the joint owners. On Barb’s death, Dick’s child will become the sole owner, with no legal obligation to share ownership with Barb’s grandchildren. Barb would have unintentionally disinherited her own grandchildren because she used joint tenancy.

There can also be gift tax implications if you put your property in joint tenancy with people other than your spouse. For example, if you purchased a new home and titled it in joint tenancy with your child, you would have made a gift equal to 50 percent of the value of the home. Because the amount of the gift is considerable, you would incur a substantial gift tax.

Joint tenancy has other drawbacks: Beneficiaries receive the assets all at once, even when they are not able to manage them, the assets may be subject to a court guardianship if you become ill or disabled before you die; you may need the joint tenant’s consent and signature to transact business; there may be more estate taxes if you are married or after your other joint tenant dies; and the assets may be immediately subject to claims of your beneficiaries’ spouses and creditors after you die.

Joint tenancy with right of survivorship is not the simple estate planning device that many people believe it to be. Most advisors never recommend it. In contrast, virtually all the problems discussed above can be avoided with a properly drafted revocable living trust.

For a husband and wife whose joint estate does not exceed the combined exemption amount, joint tenancy may be adequate for estate tax purposes. It does not, however, help avoid probate upon the death of the surviving spouse or upon the simultaneous deaths of both spouses. Nor does it address the issues highlighted in the previous answer.

For married couples having estates larger than the combined exemption amount, joint tenancy can subject a family to federal estate taxes that easily could have been avoided. This is because the spouse who dies first cannot use his or her exemption amount.

If you hold property jointly with a spouse in a non-community property state, at your death only your 50 percent of the property receives a “step up” in basis (cost basis “stepped up” to fair market value at date of death). This means that if your spouse wants to sell the property after your death, he or she may have to pay unnecessary capital gain taxes on his or her 50 percent of the property, which did not receive the step up.

It usually makes sense to divide jointly held assets before death into separate or individually held assets or into tenancy in common. If you live in a community property state, you will likely want to retitle your marital assets as community property or, even easier, establish a written community property agreement (if allowed by your state statutes) in order to receive the additional advantage of the step-up in basis income tax benefit on 100 percent of your marital assets.