Joint tenancy is the holding of equal interests in a property, account, or other assets by two or more people. It’s one of the most common forms of holding title to assets, often used between married couples or a parent and child, but it can also be established between parties who aren’t related. However, if not considered carefully, the use of joint tenancy could inadvertently create an estate planning nightmare for your heirs.
One of the key advantages of joint tenancy is probate avoidance. When one joint tenant dies, title to the assets held in joint tenancy passes automatically to the other joint tenant(s) by right of survivorship. There is no need for a formal probate process unless all joint tenants die.
The other significant advantage of joint tenancy is that all parties have equal rights to the assets held. This can be of enormous benefit should one party become incapacitated by illness, accident, advanced age, or other factors. The remaining joint tenant would still have access to the entirety of the asset, enabling them to, for example, withdraw funds from a jointly held bank account.
These features, unfortunately, can also create serious disadvantages when it comes to estate planning. Among the most significant is loss of control. Your will or trust has no effect on the distribution of joint tenancy assets, even if you change your mind about who you want to receive your assets upon your death. In addition, the entire value of assets held in joint tenancy may be available to creditors of any of the joint tenants, exposing them to risk.
Just as importantly, joint tenancy may end up derailing your intention to have your assets passed to your children. All too often, when one parent dies, the other ends up remarried, with assets from the first marriage held in joint tenancy with their new spouse. Should the surviving parent die, their new spouse could potentially receive all the assets rather than the children. Children of prior marriages can easily be cut out of receiving any inheritance by the surviving joint tenant.
Joint tenancy may also create tax problems that drain value from your estate. The creation of a joint tenancy in some assets with someone other than your spouse may be subject to gift taxation if the value is higher than the $16,000 annual gift tax exclusion. (Gifts to a spouse are generally not taxable.) Holding assets in joint tenancy can also reduce the effectiveness of a bypass trust because it passes assets outside of the trust. Finally, it can lead to income tax problems. While assets included in an estate generally receive a new, stepped-up cost basis at the time of death, assets held in a joint tenancy generally get only a partial step-up in basis, on the decedent’s share of the asset. If the assets are sold, the remaining joint tenant could then end up paying more capital gains tax than if estate planning had been handled in a different fashion.
It is possible to dissolve an unwanted joint tenancy, if, upon reflection, the parties involved decide that a different legal structure would better serve their needs and intentions. For a joint tenancy in real property, this generally involves creating a new deed by which the joint tenants transfer their interests to themselves as either community property or tenants in common. A separate written agreement between the parties may also serve to change title. To ensure this is done properly, it is best to retain legal counsel knowledgeable in the provisions of your state to provide professional advice and assistance.
Used thoughtfully, joint tenancy can be an effective part of your overall estate planning strategy. However, it needs to be considered both in light of its advantages and disadvantages, as well as your overall estate planning structure and goals. BarthCalderon specializes in asset protection and estate planning, implementing a variety of strategic approaches to safeguard your assets, minimize your tax burden, and ensure your estate is distributed according to your wishes. With our main office in Southern California, we serve clients nationwide. To find out more about our custom legal strategies for estate planning and asset protection, contact us HERE.