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 jointly owned are real estate, bank accounts and stocks or bonds. For some individuals in 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 disasterous.
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 must take legal title to the asset. In the case of a home, an owner will deed his entire interest in the property to himself and the person who he intends to recieve the property upon his death as joint tenants. Once this is accomplished, the new co-owner effectively holds power over the property. This co-owner can transfer his interest to others 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 refuses to sign the deed. As a result, the father cannot transfer the asset.
With a will or a revocable trust, the original owner can always amend the document at any time in the future. In addition, the original owner does not need to disclose his wishes to his proposed beneficiaries, so privacy is also protected.
Control is not a crucial issue in the case of a husband and wife with regard to their primary residence as each spouse will have a right of homestead and one spouse could not sell such a property without the consent of the other.
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 he will die before the person to whom he intends to pass the asset. 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.
For example, a man places a piece of property into joint tenancy with his niece. He intends that his niece and 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 descendants of a person to whom a planner wishes to give property. 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 sons each own the property equally. The child of the deceased son receives nothing from her grandmother.
Joint tenancy does not provide for a contingency plan. 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.
First, in the event that a non-spouse co-owner transfers his or her interest in the jointly owned property prior to the death of the original owner, the co-owner will most likely incur high capital gains taxes as the “basis” of the property will be the that of original owner’s basis in the property. In addition, the owner will incur 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 surfact, however, for those persons with estates greater than the unified credit ($625,000 in 1998), the estate can incur estate taxes that could otherwise be avoided with careful will or trust planning.
The above represents only a few of the problems that could be encountered in joint tenancy estate planning. Joint tenancy estate planning does work for a small minority of people. 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. Make sure that you understand the implications of joint tenancy planning and the difficulties that could be encountered. A better option would be to consult with an estate planner to make sure that you have a plan that carries out your desires.