Jointly-Held Property: Common but Complicated
Joint tenancy is a convenient form of ownership. It is a form of ownership that has been encouraged in the marketplace by financial institutions and, to some extent, by professional advisors. Joint tenancy, it is estimated, is utilized in most married couples’ estate plans. Because of the survivorship feature of joint tenancy, it is thought to create an estate plan instantly.
The Advantages of Joint Tenancy
Joint tenancy has its advantages:
- Joint Tenancy Seems Simple and Uncomplicated
It is easy, convenient and psychologically pleasing. Joint tenancy creates a “mini estate plan” which appears uncomplicated on the surface. - Joint Tenancy Between Spouses Avoids Gift or Estate Taxes
When joint tenancy is between spouses, there is no gift or estate tax on death of first spouse. - Joint Tenancy Helps Avoid Probate
Joint tenancy requires no will, trust or other estate planning device. It does not go through probate court on the death of the first joint tenant. In fact, this has been one of its main selling points. Most people think that if there is no probate, owning property jointly must be good.
How Joint Tenancy is Created
Joint tenancy is created in real estate by the words, “as joint tenants” or “in joint tenancy” following two persons’ names. Simply having both names on the title does not create joint tenancy.
With bank and brokerage accounts, confusion can occur because two names appear on the account usually accompanied by the word, “or” between them. The wording on the check does not create the joint tenancy. The joint tenancy is created by the signature card of the financial institution. On this card the words “joint tenancy” appear.
The Disadvantages of Joint Tenancy
Joint Tenancy has some disadvantages as well:
- Joint Tenancy Can Pass Property to Unintended Heirs
The problem with joint tenancy is that death has its own timing. Which joint tenant will survive is unknown. Since the timing of deaths is unknown, so are the results of owning property jointly. It is one big roll of the dice.For example, a widow with two adult children meets and marries a widower with one adult child. They combine their assets and title them “in joint tenancy”. The widow dies. The widower receives everything and the widow’s children receive nothing. If the widow dies just 5 seconds before the widower, the result is the same.
- Joint Tenancy Can Be Beneficial to Creditors
Sometimes, joint ownership is beneficial to creditors. Property taken in both names can be seized on the default or misdeed of either owner. Either of the joint owners could lose ownership in the property. - Joint Tenancy Increases Income Taxes
Joint tenancy can actually increase income taxes. Upon death, a person’s property gets a new value for calculating gains or losses on the property. This is called a stepped up basis. In a separate property state like Colorado, joint tenancy property gets only a partial stepped up basis. Only the interest owned by the deceased gets the new value. The property owned by the other joint tenant will be not be revalued.
Indeed, joint tenancy has its disadvantages. It can pass property to unintended heirs, affords no planning opportunity and offers little control. There can be gift taxes and death taxes levied when the joint tenant is not a spouse. Under the wrong circumstances, the creditors of one joint tenant can take the property. There can be income tax disadvantages because only half of the property gets a stepped up basis at death.
When all the disadvantages are considered, joint tenancy may not be the way to hold property.
