Developing a Plan to Protect Individuals, Families, and Businesses.

Joint Tenancy

Joint Tenancy With Right of Survivorship
Sometimes an Incomplete Plan

Joint tenancies with a right of survivorship can satisfy some planning needs.  Two people can purchase a house as joint tenants, so that in the event of one owner’s death, title of the property will pass to the surviving owner.  Joint tenancy with the right of survivorship can be set up with other forms of assets, such as bank accounts. 

There are several advantages to having a joint tenancy with the right of survivorship.  First of all, setting up joint tenancies with the right of survivorship is easy and virtually cost-free.  Another huge advantage is that the property will pass to the surviving owner immediately and outside of probate, which will save costs to the survivor.   One other advantage is that the creditors of the deceased joint tenant, with the potential exception of Medi-Cal, will not be able to collect against that property.  The reason is that it is deemed that the deceased joint tenant does not own that property at death.

However, as with anything that is cheap and easy, there are huge drawbacks as it only fits the most limited situations.  The following is a list of the disadvantages of setting up a joint tenancy:

1. No Step-Up in Basis:  Normally when a person passes away, the value of the property that is transferred is the value at the date of death.  Presuming that the property has increased in value, that is advantageous for those who inherit it because if they sell the property right away they will not be subject to capital gains tax.  Even if the beneficiaries do not sell the property right away, the gain will likely be smaller.  
a. For married couples, only community property receives a full step-up in basis.  Thus, if married couples choose to have a joint tenancy, they should do so as community property with the right of survivorship.

2. Other Potential Tax Consequences:  The addition of a joint tenant, who has not paid any money towards the purchase of the share or property, is considered to be a gift.  This act can open up the donor to gift tax consequences.  Unless an exemption applies, the creation of a joint tenancy may also trigger reassessment for increased property taxes. 

3. Loss of Control:  The person adding joint tenants may lose control over the property, since all joint tenants have a right to access the property.  For example, if someone decides to add joint tenants to his bank account, that person will likely have rights to withdraw some or all of the funds. 

4. Creditors of Joint Tenants:  If the joint tenant has any creditor issues, the creditors can attach to the property. 

5. Limited Planning:  Joint tenancies can be great if you only want it to go to the surviving joint tenant and let that survivor do whatever he or she wants with it.  However, this does not guarantee that it will be distributed to the deceased’s children or that probate will be avoided on the survivor’s death.  This also does not provide for the situation of a simultaneous death.

Setting up a joint tenancy just to avoid probate may not be in a person’s best interest.  Prior to creating a joint tenancy, a person should first consider the potential consequences against that person’s objectives.

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