Many people utilize the concept of joint assets or joint tenancy to plan their estate without a will or a trust. Because joint assets transfer automatically to the surviving owner upon the death of a co-owner, the assets avoid probate. Assets commonly owned in this way are real estate, bank accounts, and stocks or bonds. For some individuals, under the right circumstances, joint ownership estate planning can be a simple and inexpensive way to plan for asset transfers upon death. For others, however, the results can be disastrous.
THE CONTROL IS GONE
The most obvious result of joint tenancy estate planning is a loss of control to the original owner of the asset. In order to pass the asset on to another person, that other person is given immediate legal title to the asset. In the case of a home, an owner will deed the owner’s interest in the property to the owner and the person who he intends to receive the property at death as joint tenants. Once accomplished, the new co-owner effectively holds power over the property. The co-owner can transfer an interest in the property to third parties without the consent of the original owner and, worse yet, might not consent to a transfer of the asset that is desired by the original owner.
For example, a father owns a parcel of land. He transfers that land to himself and his daughter as joint tenants. Later, the father enters into an agreement to sell that land for a significant and unexpected profit. However, the daughter, at the suggestion of her spouse, refuses to sign the deed and demands part of the profits in return for her signature. As a result, without further court action, the father cannot transfer the asset.
Worse yet, what if that asset was a bank account with a child added as a joint tenant? The child has immediate access to the assets and could withdraw all funds from the account. The original owner could not stop it.
With a will, land trust, or a revocable trust, the original owner can name a future beneficiary to take ownership of property at death while retaining the flexibility to amend the document in the future. In addition, the original owner does not need to disclose future gifts to proposed beneficiaries, so privacy is also protected.
Control is a less crucial issue in the case of husbands and wives, especially with regard to their primary residence, as each spouse will already have a right of homestead and one spouse could not sell such a property without the consent of the other. However, when married people own property as joint tenants, probate is only avoided in the case of the death of the first spouse.
Placing property in joint tenancy as a means of estate planning is also an exercise in predicting the future. Essentially, the planner is gambling that the owner will die before the intended beneficiary. In the event that the planner is wrong about that gamble, new plans will have to be made or else the plan may meet with disaster. In the case of some property owners, it may be too late to implement changes because the owner may lack capacity to do so when the time eventually comes.
For example, a man places a piece of property into joint tenancy with his niece. He intends that his niece and, eventually, her family take the property upon his death. The niece, however, dies in an accident two weeks before the man himself dies. Because the man had no will, his three children inherit the property through the man’s probate estate via the laws of intestate succession. The niece’s family gets nothing.
There is no way to provide for the living survivors of a predeceased co-owner. Another perfect example of this situation is a widow with four sons. Each of the sons has one child. In an attempt to leave her estate equally to her four sons and their children, the widow places a property in joint tenancy with all four of her sons. Prior to the widows death, one of the sons dies. Upon the death of the widow, the three surviving sons each own one third of the property. The child of the deceased son receives nothing from the grandmother.
Joint tenancy is not flexible enough to implement complex contingency planning. Both wills and trusts allow a planner to make special provisions in the event a person predeceases them or in the event that special restrictions or protections need to be placed on assets.
DEATH AND TAXES
Finally, there can be adverse estate and gift tax consequences to joint tenancy estate planning.
In the event that a non-spouse co-owner transfers an interest in jointly owned property prior to the death of the original property owner, the co-owner will likely incur capital gains tax because the “basis” of the property will be the original owner’s basis. The owner will also face gift tax consequences.
Second, in the event that spouses are joint tenants in a property, the surviving spouse will take the asset free of estate taxes pursuant to the spousal estate tax exemption. This sounds good on the surface, however, for those persons with estates greater than the unified credit, the estate might still be subject to estate taxes that could otherwise be avoided with more careful planning.
BUT WAIT, THERE’S MORE…
This article is by no means complete and represents only a few of the problems that face those who engage in joint tenancy estate planning. Planning an estate this way works for a small group of people and it would work for everyone if people could see into the future. It is a good way to avoid probate (although, in my opinion, the Illinois probate system is not so bad) and to easily transfer assets. It is not, however, for everyone. In time, I expect that most people would find that joint tenancy planning has no “depth”. These plans scratch the surface of what can, and sometimes must, be done to prepare a complete plan. Anyone who plans an estate via the joint tenancy method needs to understand all of the implications of that plan and the difficulties that could be encountered. A better option is to consult with an estate planner to make sure that the plan is complete.