A joint tenancy is a legal term that applies to one of many forms of co-ownership of an asset that is held by two or more people. Parties named in a joint tenancy own the property equally. If one joint tenant passes away, the property is immediately passed on to the other living joint tenants without going through probate. Many types of assets may be held in joint tenancy, including real estate, vehicles, personal bank accounts, savings accounts, and brokerage and investment accounts.
Joint tenancy is ideal for spouses
Joint tenancy might look like an appealing shortcut in estate planning because it contains a right of survivorship, meaning assets avoid the probate process and surviving joint tenants assume immediate control. However, joint tenancy does have substantial risk associated with it.
Between spouses, a joint tenancy tends to work well and makes a lot of sense. It is commonplace that assets shared in a martial estate exist in a joint tenancy. When one spouse dies, the other assumes control of the asset without skipping a beat. By nature, spouses share a similar vision, goals, and credit history, which lends well to what a joint tenancy does.
In contrast, a joint tenancy shared by two or more adult children, or between a surviving parent and an adult child, can have some pitfalls. Credit issues, and disagreements between joint tenants can have potentially ruinous effects. As we’ll illustrate further, joint tenancy has disadvantages. It may or may not be suitable depending on the type of assets and the beneficiaries involved.
Joint tenancy can expose assets to creditors
A mom, Nancy, who is a widow and single, wants to make sure her son, Monty, inherits the family home. Nancy puts Monty on the deed of the property. Later, Monty runs into hard times financially, and his share of the home is exposed to his creditors. Monty is hit with a judgment lien against his share of the house, and Nancy is now in trouble. She may have to to hire an attorney to try to have the judgment removed and it is not guaranteed that she will be successful. If she isn’t, she will have lost the value of half the residence and all the legal fees she paid.
Joint tenancy may result in unintended disinheritance
A dad, Henry, has four children, and his eldest daughter, Mary, shares joint tenancy on his savings account. Henry wishes to distribute his savings among his children after he dies, and drafted a Will intending to leave each a portion of his life savings. When Henry passed away, the account immediately transferred to Mary, with the joint tenancy overriding Henry’s Will. The entire account was transferred to Mary, and the other siblings received nothing. Because of the joint tenancy ownership, Mary is legally the owner of the entire account and is not bound to share any of her father’s savings with her siblings.
Joint tenancy has tax consequences
A mom, Melissa, wants to make sure her daughter, Tracy, inherits the family home without going through probate so she puts her on the deed without Tracy contributing anything financially towards the home. Two problems arise in this scenario.
First, in the eyes for the law, Melissa has given Tracy a substantial gift, and now Melissa MIGHT be for a gift tax.
Second, by adding a joint owner during Melissa’s lifetime, it negates 50% of the IRS capital gain forgiveness on the appreciated value of the home for the surviving heir. That can have substantial income tax consequences, especially in California where property has traditionally appreciated at a rate higher than much of the rest of the country and where state income tax is the highest of any state. Let’s say Melissa’s home increased in value from $100,000 to $500,000 over the years. By adding Tracy as a joint tenant, $200,000 of the $400,000 appreciation on the property is not “stepped-up” and that portion of the capital gain is not forgiven.
Revocable living trust is usually a better fit
Joint tenancy is not a replacement for the thoughtful estate planning that a qualified estate planning attorney can provide you. In fact, all the objectives you might try in vain to achieve through joint tenancy can be achieved much more effectively through an option such as the revocable living trust.
With a revocable living trust, for example, you can:
- Control exactly how your estate is distributed — including who your beneficiaries will be, when they will receive your legacy and how they will receive it.
- Ensure that children from another marriage — or children who have special needs — will receive fair treatment from your estate.
- Reduce your estate taxes or eliminate them completely.
- Take advantage of all other tax breaks to which you might be entitled.
- Retain complete control over your assets while you live.
- Put your legacy out of the reach of your heirs’ predators, creditors and others seeking a piece of your estate.
- Protect your children’s inheritances from divorcing spouses.
- Choose when, where and how you will make gifts to friends, family and worthwhile organizations.
Enjoy peace of mind in the knowledge that you can make provisions for your care should injury, illness or some other incapacity make you unable to do so for yourself.
Contact Riverside Trust Attorneys
If you have additional questions or concerns about using joint tenancy or a revocable trust your estate plan, contact the experienced Riverside estate planning and elder law attorneys at Sandoval Legacy Group by calling (951) 888-1460 to schedule an appointment.
Have a question? Ask Dennis.
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