Many people own assets as “joint tenants.” However, joint tenancy can cause more headaches than you think.
With such a strong focus on home ownership, we need to take a moment to address the subject of legal title. Most people have legal title to their home in joint tenancy: Two or more people own the home as “joint tenants.”
Legally, that means that when a person dies, all of the deceased owners’ interests in the property immediately transfer to the surviving owners. Therefore, if John and Mary own the property jointly and John dies, then Mary owns all of the property. While it’s certainly a convenient method of ownership, there can be some unexpected costs.
Here are some things to think about when it comes to owning assets (like your house) jointly:
Some married couples and others see joint tenancy as a tool to avoid probate. After all, if you own property together, there is no need to go to court if someone dies. Joint tenancy with your spouse may prevent probate on the first death, but not on the second. You are not “avoiding” the succession but simply “postponing” it. This can expose your family to thousands of dollars in unnecessary court costs, not to mention the time it takes for an asset to get through the court system. Sure you could keep adding joint tenants, but there may be unfavorable tax consequences, not to mention family disputes.
Joint tenancy does not mean that you will necessarily avoid probate court. While you may avoid probate on a specific item of property, you may still end up probate with respect to other items. In other words, you end up in probate court anyway, which is exactly what you were trying to avoid in the first place. Once in probate court, a judge can order that all assets be preserved and/or not sold until the entire matter is resolved.
You may also have less control over the property if it is held in joint tenancy. After your death, you really have no say in what happens to the property. The surviving co-owner’s property will pass to that tenant’s heirs, which may not be appreciated by the deceased’s next of kin. This sometimes leads to “involuntary disinheritance.”
Involuntary Disinheritance: In this author’s estimation, this is the scariest result of joint tenancy. For example, suppose Mary and John own $850,000 worth of prime Los Angeles real estate jointly (like many people). They have no children and have not prepared a will. One day, Mary dies in a car accident. Ownership is then entirely John’s as the surviving co-owner. So far so good.
However, John dies a year later. The property then passes to John’s mother, who she inherits under California law. Mary’s family is out of luck. They receive $0 from the $850,000 house. You see, joint tenancy wins even if there is a will that says otherwise. It gets even worse if the surviving spouse finds “new love.” What if John marries the beautiful “Suzy” after Mary’s death and makes Suzy his joint tenant? In that case, if John dies, Suzy gets everything. Both Mary’s and John’s families are down on their luck (which could be even more problematic if John and Mary had children). Don’t let “Suzy” do this to your family! Remember, with joint tenancy, the “last person standing” gets full ownership…and they may not feel like sharing it.
Some people put their adult children on the title with them as joint tenants. The logic of parents is that, by doing so, they allow the house to pass to their children more easily upon the death of the parents. However, owning assets with adult children is often a bad idea. Why? First, if there is a difference of opinion regarding the asset, it can cause a real dispute between parents and children. Second, joint tenancy can also create unwanted beneficiaries, such as the child’s creditors or a divorcing spouse who suddenly has an interest in your home. Placing adult children on the title may be considered a gift by the Internal Revenue Service so there may be taxable consequences.
Any time you add someone’s name to an asset, you are effectively adding a “target” to that asset. If you own property in a joint tenancy, you may be exposing the asset to creditor claims. They don’t even have to be your creditors. If a joint tenant gets into trouble, the entire property may be in jeopardy. Why would you want to expose your home or bank account to potential additional liability?
Also, putting an adult child on the property title as a joint owner can cause a big capital gains tax problem. For example, suppose her parents bought their house in 1968 for $50,000. It is now worth $600,000. If your parents assign title to you, then you absorb your parents’ cost base, which can mean big tax consequences when you sell the property. You would have to pay taxes on the $550,000 gain.
If your parents’ property were held in a living trust, you could inherit the property and sell it shortly thereafter, usually without any tax consequences, since you would get an increased cost basis. In the example above, you would get the house through an estate valued at $600,000. You sell it the following week for $600,000 and there is no tax due because there was no “profit.” Even if a married couple maintains their residence in joint tenancy, they may owe more capital gains tax on a sale than would be necessary because only half of the property receives a new cost basis upon the death of one of the spouses.
Joint tenancy can also lead to family disagreements. Not all owners may agree on what to do with a property. For example, let’s say three brothers own a property as joint owners. Two children may want to sell a property because they need money or because they are tired of paying property taxes. The remaining child does not want to sell. In fact, he wants to live in the house forever and have the brothers share in property taxes and other upkeep costs. This happens more often than you might think, and children end up in court. Joint tenancy is also difficult to change. Also, once you add a joint owner to your property, you can’t just remove them from the title. They have to accept it, which can also lead to unnecessary conflict.
Therefore, having a property in joint tenancy can be an easy solution at first. However, it may turn out to be a poor choice in the long run.
Consult an estate planning attorney to see if joint tenancy is right for you or if some other form of ownership may be more advantageous. You may have to think several steps ahead, but that’s what planning is all about.
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