Many clients have questions about joint ownership of property and whether adding another individual to their property is a good way to pass down assets upon their death. While joint tenancy has its advantages, it also comes with significant drawbacks that should be carefully considered.
How Does Joint Tenancy Work?
Joint tenancy is a method of holding title to property in which all joint owners have an equal, undivided interest in the asset. This can apply to both real property and financial assets.
The key feature of joint tenancy is the right of survivorship, meaning that upon the death of one joint owner, their share automatically transfers to the remaining joint owners without requiring probate court intervention.
The Pros and Cons of Joint Tenancy
Advantages of Joint Tenancy
Avoidance of Probate: The primary benefit of joint tenancy is the ability to bypass probate. When a joint owner passes away, their share immediately transfers to the surviving joint owners, ensuring a faster and more straightforward transition.
Simplicity in Ownership: Joint tenancy allows equal ownership between parties, making it a seemingly easy way to share property or financial assets without the complexities of other estate planning tools.
Disadvantages of Joint Tenancy
Multiple Probate Proceedings: If all joint owners pass away simultaneously, such as in an accident, the property will require separate probate proceedings for each owner. This can lead to significant legal expenses and delays for beneficiaries.
Joint Liability: Joint tenancy creates shared liability for all joint owners. If one owner is sued or faces financial difficulties, creditors can place claims on the entire property. This poses a risk to the interests of the other joint owners.
Tax Disadvantages: Adding someone as a joint tenant during your lifetime has serious tax implications. The new joint owner does not receive a full step-up in basis for the property upon your death. When the property is sold, the joint owner may face substantial capital gains taxes on their portion of the asset’s appreciated value.
Loss of Control: Under joint tenancy, individual joint owners cannot independently transfer, encumber, or sell their interest in the property. This lack of flexibility can lead to conflicts or complications, especially in situations involving family members or co-owners with differing goals.
Living Trusts
For those seeking to avoid probate while minimizing risks and maximizing benefits, setting up a living trust may be a better option.
A living trust allows you to:
- Maintain full control of your property during your lifetime.
- Avoid probate without the risk of joint liability.
- Ensure your beneficiaries receive a step-up in basis for tax purposes.
- Protect your assets from creditors and legal disputes.
- Consult an Estate Planning Attorney
Joint tenancy may seem like a straightforward solution for passing down property, but it can create more problems than it solves. Before adding someone to your property as a joint tenant, consult with an experienced estate planning attorney. They can help you explore other strategies, like living trusts, to better protect your assets, minimize tax consequences, and ensure a smooth transfer of wealth to your loved ones.
By carefully evaluating your options, you can make informed decisions that align with your financial goals and family needs. Contact the Law Offices of Tony J. Tyre, Esq., APC for more information about Joint Tenancy.
