When making decisions regarding your property after you are gone, there are many options to consider. One of those considerations is whether to hold property in joint tenancy with a spouse or other individual, such as a child or a friend. Joint tenancy is where two or more people own property or accounts together and when one of the joint tenants passes away, the property goes directly to the remaining tenants. Joint tenancy is a common way that people try to avoid probate or other traditional estate planning. However, joint tenancy is not a silver bullet. In fact, under some circumstances it causes negative results.
Reasons People May Choose Joint Tenancy
The biggest reason why people choose joint tenancy over other estate options is because they are hoping that they can avoid probate for little or no cost. Probate is a court process that decides how the property of a person that has recently died will be distributed. Probate court can be expensive and takes time. Another reason why some people choose joint tenancy is because all parties involved with the property share in the positive things that ensue. One being that if one person dies, then the other party or parties immediately have ownership of that property. Some people like joint tenancy because it takes away the hassle of thinking about who to give certain assets. Under some circumstances, joint tenancy is a good solution that can be accomplished relatively easily.
Why Joint Tenancy Can Be Problematic
Joint tenancy has certain attractions and advantages, but there are several reasons why it can be problematic and is not suitable in every scenario.
Probate Can Only Be Avoided For So Long
One of the biggest issues with joint tenancy is that while it avoids probate for when the first tenant passes away, upon the death of the last tenant the property will have to be probated. This causes major complications for the family and other potential heirs of the joint tenants because at this point, it means they have to pay much more for probate and figure out how to distribute the estate.
The First Person To Die Has No Say In Their Estate Distribution
Another issue with joint tenancy is that the first person to die does not have a say in what happens with their property after their death. Because the property goes directly to the joint tenant, the joint tenant has full control over the property. This means that sometimes potential heirs could be completely left out of the estate at a surviving joint tenant’s sole discretion.
For example, a man, who has joint tenancy with his wife, passes away. His wife inherits his possessions. Eventually she remarries and when she dies her inheritance goes to her new husband. In this scenario, say that the original man had a nephew who he loved like a son. The nephew would be completely left out of the estate. Without a joint estate, the man could have left some of his inheritance to his nephew.
Joint Tenancy Causes Tax Issues
After the first joint tenant passes away, there is not usually a taxable event. However, after the death of the last joint tenant, estate taxes can reduce the holdings that the couple thought that they were leaving behind. This is because the entirety of the property is in the survivor’s estate meaning that if the whole of the estate is more than $ 11.7 million then there will be federal estate taxes. And the amount is always changing–on January 1, 2022, that exemption will be cut in half so estates worth more than $ 5.85 million are subject to federal estate tax.
Joint Tenancy Could Create Gift Taxes
If joint tenants are not spouses, there are issues that could be created when one joint tenant passes away. When an aging relative or a parent makes a younger relative a joint tenant on their property or cash accounts, the IRS often sees these transactions as gifts, not estate planning strategies. There will be gift taxes that would be much higher than the cost of what it would have been paid for probate, often at the expense of the donor and sometimes at the expense of the person receiving the alleged gift.
Joint Tenancy Creates Exposure To Risks
One of the positives of joint tenancy was that each party enjoys the benefits of the property together. The negative side of this benefit is that you do not have full autonomy of your property. This means that you will not be able to sell or dispose of your property without your joint tenant’s consent. It also means that the share of the property that you do not control could be lost based on your joint tenant’s decisions. The property could be lost due to your joint tenants’ bad debts or bankruptcy, divorce, or lawsuits filed against your joint tenant.
Have Questions Regarding Joint Tenancy?
If you have questions regarding joint tenancy or want to find out more about other estate planning strategies, we have many resources available to you here at Stevenson Smith Hood Knudson P.C. We can educate on the many options available, and will help you find the best plan for your estate and circumstances. Contact us today!