8 Dangers of Owning Property in Joint Tenancy

“Joint Tenancy With Right of Survivorship” means that each person has equal access to the property.  When one owner dies, that person’s share immediately passes to the other owner.  If there is more than one other owner, that property passes to them in equal shares.  At the death of a joint tenant, title “flees” to the other owners without going through probate.  We’ve all been told that Joint Tenancy is a simple and inexpensive way to avoid probate, and this is sometimes true.  But the tax and legal problems of Joint Tenancy ownership can be mind-bog­gling.  The dangers of Joint Tenancy include the following:

 

Danger #1: Only Delays Probate.  When either joint tenant dies, the survivor -- usually a spouse or a child -- immediately becomes the owner of the entire property.  But when the survivor dies, the property still must go through probate.  Joint Tenancy doesn’t avoid probate; it simply delays it.

 

Danger #2: Lose Tax Benefit of Step up in Basis.  Basis is generally defined as the amount you paid for an asset, plus the cost of later improvements. One must be careful of the application of the rules that apply to basis if an asset is inherited or passed by joint tenancy. If an asset is inherited, the basis of the entire asset changes to the value of the property as of the date of death of the previous owner.  The new owner receives a 100% step-up (or step-down) in basis. If the new owners sell the asset at that time, the new owners can avoid or reduce capital gains tax on the appreciation (i.e. the increase in value from the new basis and the actual value at the date of sale). However, if the asset is owned as a joint tenancy with rights of survivorship, then only the interest that passed from the deceased owner gets a step-up (or step-down) in basis. The basis for the interest owned by the surviving owner is unchanged.  When the asset is sold, the survivor will  likely have to pay more capital gains tax.

 

Danger #3: Unintentional Disinheriting.  When blended families are involved, with children from previous marriages, here’s what could happen: the husband dies and the wife becomes the owner of the property.  When the wife dies, the property goes to her children, leaving nothing for the husband’s children.  Even in a traditional or “non-blended” family, a transfer to a child in joint tenancy can disinheriting (or “over-inherit”) a child or loved one because provisions were made for them in the will, but the joint tenancy property is not subject to the terms of the will.

Danger #4: Gift Taxes.  When you place a non-spouse on your checking account or other investments as a joint tenant, you make a taxable gift of property every time that joint tenant takes property out of the account.  For example, when a mother retitles her $80,000 bank account in Joint Tenancy with her son, she makes a gift to her son every time he makes withdrawals.  This may not be the most efficient use of her $14,000 annual exclusion (2015).  The main point is that the gift is unintentional and not carefully planned. 

 

Danger #5: Right to Sell or Encumber – Loss of Control.  Joint Tenancy makes it more difficult to sell or mortgage property because it requires the agreement of both parties, which may not be easy to get.

 

Danger #6: Financial Problems – Creditor Exposure.  The asset is exposed to the creditors of all the joint owners. If a joint owner has fails to pay income taxes, has credit issues, files for bankruptcy, is entangled in a lawsuit (due to a car accident, business dealins or otherwise)

 

Danger #7:  No Fiduciary Duty to Joint Owners.  Unlike the trustee of a trust, who has a fiduciary duty to the beneficiaries of the trust in the management of the trust assets, joint owners do not have any such fiduciary duty to the other joint owners.  Courts impose the strictest standards of loyalty and care upon fiduciaries, providing great protection against negligence/mismanagement of assets.  Remember that a joint holder of a financial account may withdraw any or all of that account at any time

Danger #8: Incapacity.  If either joint owner becomes physically or mentally incapacitated and can no longer sign his name, the Court must give its approval before any jointly owned property can be sold or refinanced -- even if the co-owner is the spouse.

 

Because of the tremendous risks, I suggest: “Consider all the possibilities of risks associated with joint tenancy and carefully review the possible consequences with an attorney.”

 

You’re Invited to Call or E-mail. 

“If you have questions about owning and operating a business, and the many financial

and liability risks that you face today, please send your e-mail to

[email protected] or call me at 618.639.0461.

I’ll be happy to help you in every way.” -- Jeff 

 

Jeffrey D. Roberts, Attorney at Law w CPA w Entrepreneur

300 Commerce, Jerseyville, IL 65052  tel. 618.639.0461  2410 State St., Alton, IL 62002 618.466.2782