In follow up to the article written by our friends at Laiderman Law Firm, I wanted to expand upon some of the dangers of joint tenancy. Also, I want to give thanks to Steve Laiderman of the Laiderman Law Firm for proof reading and providing suggestions for this article.
Many people try to accomplish estate planning by simply titling assets in joint tenancy instead of obtaining a Will or a Trust. Although this is inexpensive to accomplish and does help to avoid probate, joint tenancy could end up costing you and your heirs in the long run.
10 DANGERS OF JOINT TENANCY
- Difficulty Accessing Accounts – Even though as joint owner each person technically owns 100% of the account, there could be difficulty accessing accounts if one person dies. For example, if you have a joint account with your spouse, did you know that your account could be temporarily frozen by the financial institution if your spouse dies? While this is unusual, we had a widowed client who had $170 in a joint investment account with another firm and they would not let her liquidate the account even though she was a joint owner with her recently deceased spouse. We eventually had to submit a death certificate, that can take weeks to obtain, and re-register the account into the name of the widow alone. And then the widow was able to access the money that was rightfully hers anyway. But this whole process took some time.
- Loss of Control Due to Incapacity – Transactions involving some jointly owned assets, such as stock certificates, real estate, and car titles, require two signatures. If one of the joint owners of such an asset is incapacitated, and the incapacitated owner does not have an adequate power of attorney, the court must give approval for the healthy owner(s) to sell the asset – even if it’s the spouse. There is the possibility that the courts will not allow you to sell the asset. And, any time the courts become involved, it will cost money in legal fees and court costs. Even if there is no incapacity, you must have the consent of all joint owners to sell these types of assets.
- Creditor Risk – Joint tenancy subjects the asset to the creditors of all the owners, not just your own. For example, if you have a jointly titled bank account with someone other than your spouse (a child, brother, sister, friend, etc.), and they get into financial difficulty, you could lose the asset to their creditors. Fortunately, in Missouri and some other states, the assets of a married couple have special asset protection, referred to as tenancy by the entirety, where the creditors of one spouse cannot attach the joint assets of the couple.
- Assets at Risk of Divorce, Lawsuits, and Bankruptcy – You could lose your asset if you or any one of the other owners face divorce, lawsuit, or bankruptcy. Again this would not apply to a married couple.
- Irrevocable Decision – Once you allow a person to be a joint tenant on your account, you cannot remove them without their approval. It is an irrevocable decision, so think twice before you do this. This is very common in the situation where there is land or property in the family and all of the siblings are named as joint tenants. This could be very problematic if one of the owners wants to sell their “share” of the property. Additionally, any one of the joint tenants could request that the asset be divided up, which would then likely subject all the owners to a legal battle they did not anticipate. Also, if any of the joint owners are married, the property cannot be sold without the consent of their spouses.
- Capital Gains Tax – Jointly held assets could be subject to significant, unnecessary capital gains tax. The rules here are pretty complicated and differ depending upon whether the joint owner is a spouse or non-spouse. In either scenario, jointly titling an asset could result in needless capital gains tax.
- Gift Tax – Jointly held assets could be subject to gift taxes. On certain types of assets when you add a joint owner (that didn’t pay anything for the asset), who is not a spouse, you have given them a gift. For most people this does not create a gift tax because you have to gift over $5.43 million for a gift tax to apply. Even if your gifts aren’t large enough to face a gift tax, you still may be required to file a gift tax return. It’s important to note that if you have sizable assets think twice about adding a joint owner as the gift tax exemption used will reduce your estate tax exemption by the same amount.
- Heirs Could Be Disinherited – If one joint tenant dies, then the remaining joint tenants become 100% owners of the asset. This means that the children of the joint tenant who died would be potentially disinherited. To try to avoid this, you can list all the owners’ children as beneficiaries; however, there is no guarantee that the children will still receive anything. Reason being is that the last living joint tenant could change the beneficiaries. Example, husband and wife each have children from previous marriages. The couple titles their assets (i.e investment accounts, home, savings accounts, etc.) into joint tenancy and also names all the children as beneficiaries. If the husband dies, the wife becomes sole owner of the assets and she could legally change the beneficiaries to her children. Once she dies, the asset passes to her children, thereby disinheriting her husband’s children.
- Joint Tenancy Trumps Wills and Trusts – Joint tenancy causes estate planning to be ignored. Even though you list in your Will or Trust that you want certain assets to go to certain people in a certain way, all of this will be ignored if you title assets in joint tenancy.
- Joint Tenancy Only Delays Probate – Many people title assets in joint tenancy to avoid probate, but it actually only delays probate. Once the last survivor of an asset in joint tenancy dies, the asset goes through probate (unless a TOD (Transfer on Death) is in place).
HOW TO MINIMIZE THESE DANGERS
There is no one perfect solution to eliminate every one of these dangers. However, you can significantly minimize the impact of these risks by having a Trust drafted and titling your assets into the name of your Trust. A Trust would allow for specific instructions to be spelled out to help protect against heirs being disinherited, unnecessary taxes being owed, creditors being allowed to seize the assets, control being lost, etc.
Although joint tenancy seems like the easy, inexpensive option for estate planning, hopefully you can now see the associated dangers, costs, and headaches.I would love to hear any comments you have or personal experiences you have had. Please share them below.
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