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Joint tenancy to avoid probate can backfire in some situations

by Jade Verity | Contributor
September 17, 2020

Joint tenancy with rights of survivorship (JTWROS) is a method of titling assets, such as real estate or a bank account, that gives two or more people equal ownership interests in that asset. The co-owners (called “joint tenants”) enjoy equal rights to the asset while they are both alive, and when the first joint tenant passes away the survivor automatically owns the entire asset. Because of this automatic right of survivorship, the asset does not need to pass through the probate process.

Spouses frequently title their home, bank accounts and other assets as joint tenants so that the surviving spouse will automatically inherit and have full access to those assets after the death of the first spouse. When used between spouses, JTWROS can be one part of a complete estate plan.

However, when someone who is not a spouse is added as JTWROS on property, unintended results can occur. This is frequently seen in the case when an older person adds an adult child as a joint tenant on their accounts. Some of the pros and cons of using JTWROS with a non-spouse are discussed below.

Pros & Cons of Joint Tenancy With Rights of Survivorship
Pros Cons
Avoids probate Does not avoid probate for the survivor
Simple Gives away your right to fully control your property
Inexpensive Asset can be used to satisfy creditors of any of the owners
Allows the Joint tenant to manage the asset if you become incapacitated Undesirable tax consequences
Unintended disinheritance
There are better ways to accomplish these goals without the risks of JTWROS!

Does joint tenancy avoid probate?

If you hold title to an account or a piece of property as JTWROS, that asset will not have to pass through the probate process when the first joint tenant dies. However, it does not avoid probate for the survivor, or in the event that both owners die simultaneously. For example, Dan and Nancy are married and they own their home as JTWROS. Dan passes away first, and Nancy automatically becomes the sole owner of the home without the home having to go through probate. But when Nancy dies, the home will have to go through probate unless she has done other planning to avoid it. Alternatively, placing the house in a revocable living trust can help both joint tenants avoid probate.

Can I still control my property if I add a joint tenant?

Joint tenants are equal co-owners, and each owner has the same rights as the other to control the property. While you may still have control over the property, so will your joint tenant. For example, if Barbara adds her adult daughter, Jane, as a joint tenant on her bank account, Barbara still has the right to go into the bank and take all of the money out of that joint account. But, Jane also has the right to empty the account.

Another strategy that accomplishes the same goal without the risks would be to retitle the account in the name of your revocable living trust, and give Jane a power of attorney to manage your account in the event you are incapacitated. Alternatively, if your bank allows you to designate a transfer-on-death beneficiary for your account, it would transfer automatically after your death without giving up any control over your account during your lifetime.

Can creditors attach joint tenancy property?

One of the biggest drawbacks to titling property as JTWROS is that the entire property may be used to satisfy the debts of one the joint tenants. This scenario is typically seen when a parent includes their adult child as JTWROS on the ownership of a home, bank account or other property. If that child is on the losing end of a civil lawsuit, files for bankruptcy or goes through a divorce, the jointly held property may be considered an asset that is available to satisfy the child's debts.

Booklet opening animation of our free requestable booklet 'Joint tenancy and estate planning'

For example, in the case of Nikirk v. U.S. (2003 WL 22474742 (D. Ariz. 2003), a woman added her adult son as JTWROS on the title of her rental property. The son did not contribute to the purchase price of the home or to any of the expenses for maintenance, property tax or insurance. The IRS later sued the son to collect unpaid taxes and the property had to be sold to pay what the son owed.

To protect property from the creditors of your adult children or other loved ones, consider putting the property into your revocable living trust and including a “spendthrift provision” that can help shield your property from the creditors of your beneficiaries.

Are there tax consequences to joint tenancy?

If you are considering adding a non-spouse as JTWROS to your property, you should be aware that there may be tax consequences. For certain types of property, when you add a joint tenant and that person has not financially contributed to purchasing the asset, there may be gift tax consequences. The IRS may determine that by adding the person as a co-owner, you have gifted them with half the value of the asset, and you (not your joint tenant) may be liable for the payment of gift tax.

A property titled as JTWROS may also lose favorable tax treatment at the death of the first joint tenant. For example, James purchased his home for $400,000. That amount is known as the tax “basis,” meaning that when the property is eventually sold or transferred, tax will only be owed on the amount in excess of $400,000. When James passes away his home is worth $1 million, so the property has a capital gain of $600,000. The house is inherited by James's son, Roger, who will not owe any tax on the $600,000 of capital gain. The capital gain that occurs before James's death is essentially forgiven by the IRS. If Roger later sells the property, he will only owe tax on any amount over the $1,000,000 date-of-death value of the property. This is commonly referred to as a “stepped-up basis.” However, if James had named Roger as JTWROS on the deed to his house, the stepped-up basis rules will not apply and tax may be owed on the entire amount of the capital gain based on James's $400,000 purchase price.

Can I leave my half of joint tenancy property to someone else in my will?

Joint tenancy with rights of survivorship means that the property transfers automatically to the joint owner upon your death (that is the meaning of “rights of survivorship”). You cannot overrule this by leaving your joint property to someone else in your will or trust. Thus, you may unintentionally disinherit someone if you are not able to leave your share of the property to the person you wish to receive it. Other forms of joint ownership, such as “tenants by the entireties” do allow you to leave your share of the property to someone else.

Accomplish Your Goals with Better Strategies
Goal Better Strategy
Avoids probate Revocable Living Trust
Simple, inexpensive Beneficiary designations or transfer-on-death accounts
Allows someone to manage the asset if you become incapacitated Power of Attorney

For example, Linda owns her home as JTWROS with her daughter, Kelly. Linda also has two other daughters and her wish is that upon her death all of her assets should be divided equally among them, which is what she has specified in her will. However, when she passes away, Kelly automatically takes ownership to the entire house which cannot be gifted through Linda's will. Kelly is also entitled to one-third of Linda's other assets pursuant to the terms of Linda's will, thus defeating Linda's plan of dividing her assets equally between her three daughters.

In order to achieve Linda's desired result of an equal division of all of her assets, she could re-title her home and other assets in the name of her revocable living trust in which she names her three daughters as equal beneficiaries.

In the context of spouses, joint tenancy with rights of survivorship can be a useful and tax-neutral planning strategy. However, if you are considering naming a non-spouse as JTWROS on your home, bank account or other asset, there may be a better way to accomplish your goals without the risks that accompany JTWROS. An experienced estate planning attorney can help you find the strategy that's right for you.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

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Email - info@legacyassuranceplan.com
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