Avoid common mistakes and misconceptions about joint tenancies

When someone refers to a “joint tenancy” they're referring to two or more people owning the same piece of property, such as real estate or a bank account. Depending on applicable state law, there are three major types of joint property ownership that could apply to the term “joint tenancy.”

First, there's joint tenancy with rights of survivorship.

Also known as JTWRS, this is what most people are probably talking about when they say they want a “joint tenancy.” A joint tenancy with rights of survivorship usually involves two or more owners with equal ownership interests in the property. But when one of the owners dies, the deceased's legal interest in the property automatically gets distributed to the surviving owner(s). There's no need for probate to make this change in how the property is owned.

For example, Mary and Jane own a home together as joint tenants with rights of survivorship. They each have a 50% interest in the home. If Mary dies first, her 50% interest immediately transfers to Jane. Now Jane is the sole owner of the home with a 100% legal interest in it. One of the great things about a JTWRS is that it applies to almost any kind of property, such as vehicles, houses, bank accounts and investment securities.

Second, there's a tenancy in common.

Depending on the jurisdiction, this could be referred to as a joint tenancy. A tenancy in common differs from a JTWRS in that each owner may have different ownership interests in the property. However, the joint owners will usually have equal access to the jointly owned property.

Another major difference is that when one of the owners dies, the deceased's interest in the property transfers to the heirs of the deceased as set out in the deceased's will. And if there's no will, the interest transfers under the applicable intestate laws.

So modifying the Mary and Jane example above, let's say Mary has a 75% interest in the property while Jane has a 25% interest. If Mary dies first, Jane doesn't automatically get Mary's 75% interest in the property. Instead, it would transfer under the terms of Mary's will, assuming she has one.

This could lead to unintended consequences for the surviving owner. If the property at issue is a business, the surviving owner now has to run the business with a brand-new business partner. If they're lucky, it's someone they know and trust who can seamlessly step into the prior owner's shoes and help run the business. If the surviving owner is unlucky, the new business partner is a complete stranger or someone they don't get along with very well.

Third, there's a tenancy by the entirety.

Only married couples can have this type of joint ownership, and it means both spouses own the property as a single entity as far as the law is concerned. So each spouse has a 100% ownership interest in the property at the same time. Tenancy by the entirety also creates a right of survivorship, similar to JTWRS.

In a way, a tenancy by the entirety is similar to a JTWRS, except it's for married couples. However, one major difference is that a creditor can't enforce a lien on a property subject to a tenancy by the entirety unless both spouses own the debt (although in some states, a JTWRS will have similar creditor protections). Another important difference is that many states don't recognize tenancies by the entireties. Currently, only about 25 states have tenancies by the entireties.

For most estate plans not limited to a married couple, a joint tenancy with rights of survivorship is usually what people want to create, not a joint tenancy in common. Depending on what state the property owners are in, it's usually best to use as clear language as possible.

For instance, instead of saying “to Mary and Jane as joint tenants,” the estate planning or legal document should say, “to Mary and Jane as joint tenants with rights of survivorship and not as tenants in common.” Of course, it's best to consult with an experienced estate planning attorney in the state where you live or where the property is located. But this gives you an idea of why it's important to be clear about what kind of joint ownership you're creating.

It's easy to see why the joint tenancy with rights of survivorship is so popular, especially for estate planning purposes. But despite its advantages of survivorship rights, avoiding probate and joint owners having equal access to the property, there are certain drawbacks or considerations to be aware of.

First, there are potential tax implications.

Traditionally, a joint tenancy with rights of survivorship could only be created with the Four Unities of time, title, interest and possession.

• Time: This meant that the joint owners had to acquire the property at exactly the same time.
• Title: The owners have the same title to the property.
• Interest: The owners need the same legal interest in the property. This also refers to all the owners having to act together to make certain decisions about the property, such as using it as collateral for a debt or selling it.
• Possession: All owners have the right to use or possess the entire property. So if the property is a house, all owners have the legal right to live in the home and use it as reasonable owners would.

But some states don't always have such strict requirements for creating a JTWRS. This is especially true when it comes to the time element. Some states recognize a joint tenancy with survivorship rights even if the second or third owner is added at a later time. This is great in that it makes the JTWRS easier to use and accessible to more people. But it can also lead to unintended tax implications, such as a taxable gift.

Imagine you have a bank account and you want to make John a joint owner by using a JTWRS. If you do that, John is now a co-owner of the account and has immediate access to the money in the account. Depending on the applicable gift tax exclusion and the amount of money in the account, a gift tax could be owed. This tax scenario usually won't apply if you're making your spouse the co-owner, though.

Second, there are debt considerations.

Depending on the state, any owner of property held with a joint tenancy with rights of survivorship could encumber the property with a lien, levy or mortgage. This means creditors could have access to your property due to the financial decisions of your co-owner.

Third, you need to trust your co-owner and make sure they can handle the property appropriately.

Remember, even though a joint tenant in a JTWRS may only have a 50% legal interest in the property, they have 100% access to the property from a practical perspective. So if you add someone to your bank account as a joint owner under a JTWRS, they could withdraw all of the funds and there's practically nothing you could do to stop them.

Fourth, not having other estate planning documents, like a will or durable power of attorney.

One of the biggest benefits of the JTWRS is the ability to avoid probate. But that only works when there are at least two owners of the property.

If Mary and Jane own a house as joint tenants with rights of survivorship and Jane dies, her interest passes on to Mary without the need for a probate court. But what happens when Mary dies? She needs a will to ensure her house gets transfers as she intends.

Another reason a will is needed is for the off chance that all the owners die at exactly the same time. In this situation, probate isn't avoided. Instead, each of the deceased's legal interests in the property would transfer to heirs as set out in the wills of the deceased. If there's no applicable will, then the state's intestate laws would decide who gets the ownership interests in the property.

As for a durable power of attorney, think about a situation where one of the JTWRS property owners becomes incapacitated. The other owner(s) are limited in what they can do with the property because they need all owners to approve the decision. This is particularly true when trying to sell the property. But if the incapacitated owner created a power of attorney, the agent of the incapacitated owner could work with the other owners of the property to discuss what needs to be done.

Fifth, in most states, the legal interests in property owned by a JTWRS must be equal among the joint owners.

This usually isn't a problem in that all owners will have full access to the property. But if the creator(s) of a JTWRS property wants one owner to have a majority ownership interest in the property, a JTWRS probably isn't the best option.

Sixth, it's easy to destroy a joint tenancy with rights of survivorship.

Any of the joint owners in a JTWRS can transfer their legal interest to someone else. When this happens, the Four Unities no longer exist.

For instance, one of the owners could sell the interest they have in the property to a new co-owner. Or one of the owners could transfer their JTWRS interest to themselves, but change the interest into a tenancy in common. This would then make it possible to transfer their interest in the property to anyone they wanted.

Seventh, not thinking about how the joint tenancy affects the owners' estate plans as a whole.

We can use a hypothetical to demonstrate how a joint tenancy with rights of survivorship could disinherit your children.

Let's say you have three kids and one bank account. When you die, you want whatever is leftover in the bank account to be distributed equally among your surviving children. However, you need help paying your bills, so you want one of your children to have full access to the bank account.

If you choose one child to be the co-owner through a joint tenancy with rights of survivorship, then they have full access to the money in the bank account. If they're a good child, they'll do the right thing. But they can still decide to keep all the money for themselves.

This would prevent your other two kids from getting any of the remaining funds in your bank account when you pass away. In this situation, your JTWRS overrides whatever you wrote in your will. Your two disinherited children are then faced with two equally unpleasant decisions. They can let the child who took all your money get away with this morally questionable act or they can sue and face potentially extensive litigation that may cost far more than the money left in your bank account when you died.

The joint tenancy with rights of survivorship is a very common estate planning tool to avoid probate. It's fairly easy to create and makes it simple for multiple owners to utilize a single piece of property. But if you're not careful, there are potential pitfalls that can lead to unintended consequences, like litigation, disinheriting your heirs or owning the property with a stranger.