The Dangers of Joint Tenancy

The origins of Joint Tenancy, the most common form of ownership of real property for co-owners (usually married couples), date back to 16th Century England. The primary reason for its continued popularity is its simplicity. The right of survivorship that is at its core renders the transfer of property between co-owners when one dies essentially automatic. In other words, if two co-owners hold title as Joint Tenants, when the first one dies, the property simply becomes the sole property of the survivor.

This simplicity has effectively made Joint Tenancy the “default” form of ownership for co-owners. And this form of ownership is not limited to real property – if, for example, two people have a joint bank account, that account’s legal form of ownership is Joint Tenancy.

Fun Fact – if you see the term “Joint Tenancy With Right of Survivorship,” (not uncommon) the inherent right of survivorship that defines Joint Tenancy renders that phrase redundant and repetitive.

So, all good, right? Maybe not so much.

The problems with Joint Tenancy start to accumulate when one examines Joint Tenancy in the context of Probate. Obviously, when the first of two Joint Tenants dies, the right of survivorship ensures that the asset flows to the surviving Joint Tenant free of probate. But what happens when the resulting sole owner dies? Probate happens.

Even if that surviving Joint Tenant had a will that states their intention as to who they want to inherit the asset, the asset would have to be the subject of a probate proceeding. Therefore, Joint Tenancy does not avoid probate, but merely puts it off. And the very nature of the right of survivorship that makes the transition so smooth from two Joint Tenants to one after the death of the first has the effect of lulling folks to sleep: “Gee, that was easy when Dad died, everything just flowed to Mom, therefore it’ll be easy when Mom dies, it’ll all flow to us, right?” Wrong.

And it can get worse. Of all the bad advice out there, for some reason this piece gets followed more than most. Often that surviving Joint Tenant will try to “beat the probate system” by adding another person to title as a Joint Tenant (most commonly, the surviving spouse will add one of the children to title as a Joint Tenant) so that the “string” of Joint Tenants is extended, thus avoiding probate. Then, the expectation is, that after the death of the second parent, that one child who was the surviving Joint Tenant will “do the right thing” and divide the property among all the children.  Maybe . . . but there is no legal obligation for that to happen and, in many cases, that child will turn to his or her siblings and say something to the effect of “Well, I guess Mom and Dad must’ve like me best”, and there would be nothing the siblings could do about it – even if the parent’s will declared that it was to be divided equally. That is due to the fact that form of title trumps everything!

And, even if that sibling wanted to “do the right thing,” he or she would face gift tax implications if they shared with the brothers and sisters (since they’re at that point giving away what is legally theirs).

Well, you’re thinking, why not simply add all the kids as Joint Tenants to eliminate the possibility of one child not sharing with the siblings? Because by eliminating that one problem that parent would be exposing themselves to a whole host of potentially devastating outcomes. Keep in mind that multiple Joint Tenants own what is known as a 100% undivided interest in the asset while living – that means that if one of the Joint Tenants has a problem such as a divorce, a car wreck, bankruptcy, outstanding child support obligations, etc., the creditor can take the entire property – not just a fractional share!

Consequently, if someone tells you that you can defeat probate on your home by adding your kid or kids to title with you as Joint Tenant(s), DO NOT BELIEVE THEM – you are getting bad advice.
And, to complete the panoply of reasons why Joint Tenancy is far from optimal (despite the irony of it being the default form of ownership for couples), it leads to a vastly inferior tax treatment than that available via alternative forms of ownership – the ultimate, of course, being ownership vested in a Living Trust.

If you have any questions or would like more information, please don’t hesitate to call (877-585-1558), email us or register to one of our free workshops or webinars.

By Paul Morison

(Photo Credit: Nani Chavez)

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