Sometimes people use Joint Tenancy as a simple way to do Estate Planning. This can have drawbacks, sometimes serious and unexpected.
First, why is Joint Tenancy a simple way to do Estate Planning? At the death of a joint tenant, the property automatically transfers by operation of law to the remaining joint tenant(s). This can be attractive because it bypasses the probate process and all it entails. Probate is the process that moves property titled in the name of one person (the decedent) and moves it to the name of another person. Probate is a public process, lacking privacy. Depending upon the state, probate can be costly and time-consuming. With Joint Tenancy, probate isn’t required because it passes by operation of law by its very nature.
However, if a couple wants to avoid probate, while Joint Tenancy avoids probate at the death of the first joint tenant, it doesn’t avoid probate in the estate of the survivor. At the survivor’s death probate would be required unless further planning is done. The problem is the survivor may be unable to plan because of grieving, incapacity, or simultaneous death.
Let’s look at a quick example. John and Mary own their home in Joint Tenancy. This seems to work well for them for years. Driving home from work one day, John has a heart attack and dies. The property transfers by operation of law to Mary. However, Mary’s now distraught from John’s death and puts off planning for the property. Mary dies with the property in her name and a probate is required. Of course, if John and Mary had died in a common accident, probate would have been required, too.
However, there could be more serious problems with Joint Tenancy. Let’s say that Mary in our example above did further planning by adding John and Mary’s only child, Josh, as a joint tenant. While this would avoid probate at Mary’s death, just as it did at John’s death, it causes other issues.
Josh could decide to sell his half of the property. Of course, Mary says he would never do that. Maybe he wouldn’t, voluntarily. However, let’s say Josh is sued and they get a judgment against him. They can satisfy it against any of his assets, including his ownership interest in the property he holds in Joint Tenancy with Mary.
So, in addition to the risk that Josh might not cooperate or could make Mary’s life difficult, his actions could cause Mary to lose the half of the property in Josh’s name to Josh’s creditors. While Mary was trying to save a little money by putting the property in Joint Tenancy, she jeopardized her future.
There are also tax consequences with adding a non-owner to an asset as Joint Tenant. The original basis is assessed to the surviving Joint Tenant upon sale of the asset. In essence, there is no step up in basis for the asset. In this scenario, Joint Tenancy just bought the surviving Joint Tenant a date with the capital gains tax people.
If John and Mary had utilized a Revocable Trust instead of Joint Tenancy, the property would have avoided probate. If Mary hadn’t compounded the problem by trying to use Joint Tenancy with Josh, she could have avoided losing half the property to Josh’s creditors and avoided capital gains taxes.