Joint Tenancy as a Poor Choice for Estate Planning

Joint Tenancy is one of many ways two or more people can hold title to property. Most married couples hold title to their homes as Joint Tenants. It is one of the simplest ways to hold property. Here is how it works most of the time:

John and Mary are a married couple and purchase a home together. The deed says that they are “Joint Tenants.” John dies. Mary files an “Affidavit of Surviving Joint Tenant.” She is now the sole owner of the home. The property is not subject to probate or claims of John’s estate. When Mary dies, the property is part of her estate.

Common Mistake: Mary thought that it worked pretty well when her husband died and thinks that this would be a great way to pass on property to her children. However, there are dangers in doing so.

Ownership: Each person who owns an interest is a “Joint Tenant. Each “Joint Tenant” has the right to occupy the whole of the property but not to the exclusion of the other Joint Tenant. In other words, every “Joint Tenant” can use the entire property but cannot excluded the other Joint Tenants from the property.

Some people attempt to use Joint Tenancy as an estate planning tool to pass property to their children. This can have disastrous consequences because the deed will give children an immediate property interest and rights. There are several issue that can arise when dealing with property held in Joint Tenancy. Common issues include:

  • Tax liens of co-tenants;
  • Bankruptcies of co-tenants;
  • Divorce actions of co-tenants;
  • Judgment liens of co-tenants;
  • Partition action by greedy co-tenants; and
  • Occupancy rights of co-tenants.

Examples: Mary owns property and wants her children Doug and Sue to inherit it. She also wants to avoid the expense of probate. She deeds the property to herself and her children as Joint Tenants expecting them to “inherit” the property when she dies. Then one of the following occur:

  • Sue dies before Mary. Mary would have wanted the property to pass to Sue’s children. This will not occur unless Doug executes a deed with Mary adding Sue’s children as Joint Tenants. Doug is reluctant to execute the deed because in the event that he dies next Mary and Sue’s children would have to execute a new deed which add Doug’s children as Joint Tenants.
  • Doug is sued (car accident, debts etc.), filed bankruptcy or gets divorced. If the property is Mary’s home, it will be protected as a homestead that will prevent execution. If the property is not homestead, the creditors or bankrupt trustee will likely seek to attach the property. In any event, there will title problems that may prevent the property from being sold or mortgaged. Doug will not inherit the property an intended.
  • Sue becomes estranged from the family. She could bring a partition action to have the property sold and proceeds divided. She could also sell the property to a third party who can take the same action.

Joint Tenancy is usually the worst choice for an estate plan.

Better Solutions:

Trusts: A better way is to hold the property in a revocable trust. The trust can provide for the intended distribution if a child predeceases you. A trust can protect an inheritance from almost all creditors. The trust can be amended as circumstances change. In short, it provides the owner with control and prevents unintended outcomes described above.

Trusts are relatively inexpensive to establish and are a bargain when compared to the expense, time and frustration of dealing with probate court. Trusts require no reports or tax returns during its creator’s lifetime.

Transfer on Death Deeds: Some states have adopted a Transfer on Death Deed statute. The owner files a Transfer on Death Deed which names beneficiaries. Title to the property does not change. Therefore, it can be sold, mortgaged, and conveyed without the approval, consent or notice to the beneficiaries. There is no need to go to probate court. A Will, created before or after the deed, does not change the beneficiaries. The deed takes is effective against a spouse who marries the grantor after it is recorded. The grantor must revoke the deed if another distribution plan is wanted. There is also a time-limit for the beneficiary to claim the property. There are other benefits and pitfalls that should be discussed with an attorney.Disclaimer: This comment is informational and is not intended as legal advice or to create an attorney/client relationship. Readers should not rely upon such information to take or refrain from taking a particular course of action. The skills of a competent licensed attorney should be consulted as situations in individual cases vary.

IRS CIRCULAR 230 NOTICE: Any tax advice in this message is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties.