Jointly owned property is probably the least-understood area of estate planning today. Joint tenancy with rights of survivorship means that each joint tenant has a full and undivided interest in the property. Neither party can sell the property without the other’s consent. Upon the death of one party, the entire property passes to the survivor automatically, avoiding probate. Popularly known as “the poor man’s will,” joint tenancy causes more litigation than any other estate-related problem. Stocks, bonds, bank accounts and real estate are types of property most often held in joint tenancy.
There are three major advantages to owning property in a joint tenancy arrangement: bonding, creditor protection, and probate avoidance.
Bonding: Joint ownership may help develop trust between partners. It provides tangible proof that the relationship is a partnership and that the contribution of each person is valued equally. Some commentators refer to this advantage as “promoting domestic tranquility.”
Creditor Protection: In the event that one partner has issues with ligation or debt, any asset held in the name of both partners as joint tenants is protected from foreclosure or repossession. If both partners owe the debt, or if the debt arises out of the possession owned jointly, the protection will not be effective.
Avoidance of Probate: Probate is the court-supervised process of establishing the validity of a will and administering a decedent’s estate. Probate fees usually amount to about six (6) percent of the estate.
While there are only a few advantages to joint ownership, there are at least seven key disadvantages: inflexibility, unwanted beneficiaries, inexperienced partner, estate-tax issues, income-tax problems, gift-tax issues and family feuds.
Inflexibility: Neither party can give away joint property by means of a will. A will only controls property in an individual’s name and does not include property owned jointly. In addition, neither party can sell, rent, or use the property in question without permission of the other party.
Unwanted Beneficiaries: Joint property may pass to someone you don’t wish to receive it. In effect, a stranger may inherit your assets. Should you and your partner own a home as joint tenants, if you die and your partner meets another person whom they wish to leave the property to, they can do so with no restriction whatsoever, even if the property was originally yours and it is being donated to a person or organization against your living wishes.
Inexperienced or Incompetent Partner: The surviving partner may not be experienced in money management, or may be physically or mentally disabled. Who will take care of the assets then?
Estate-Tax Troubles: Since all joint property goes to the surviving partner, it will be subject to the estate tax when the surviving partner dies. In unmarried and same-sex relationships, there is no unified estate-tax credit. The family of the surviving partner would be asked to pay the government an amount equal to fifty-five (55) percent of all assets over the estate tax threshold.
Income-Tax Problems: Joint tenancy will create an additional problem if the estate owns any assets that have gone up in value. If the property is passed through a will or trust at death, the cost-basis is “stepped-up” to the value at the time of death so that the beneficiary will not have to pay any capital gains tax. However, a surviving joint tenant would be forced to pay income tax on any increase in value between the time of purchase and the death of the first joint tenant.
Gift-Tax Issues: If you own property in your own name and voluntarily give half of that property to your partner, you will be asked to pay a gift tax on the value of the ½ interest in property you gave to him. Currently, the gift tax is forty-five (45) percent of any gift over $13,000.
Family Feuds: Frequently, an individual who places an asset in joint tenancy later decides that he wants it back. Without the other partner’s consent, there is no legal way to transfer the asset back. Should a romantic relationship end, the property will retain the status of owned in joint tenancy.
It should be noted that a comprehensive estate plan centered around a Revocable Living Trust will accomplish the goals of avoiding probate and simplifying the distribution of assets without all of the negatives attached to joint tenancy, as described above. A Revocable Living Trust is the ideal vehicle for protecting those that you love most in the event of your death or incapacity.