A joint tenancy is often used by people looking for an inexpensive way to avoid probate of real estate. This section of our guide deals with how joint tenancies are used and the pros and cons of using them.
What is a Joint Tenancy?
A joint tenancy is way of titling an asset in the name of more than one owner. At the death of one of the owners, the real estate passes automatically to the surviving owner (or owners), without the need for probate. This feature is known as a right of survivorship.
Joint tenancies are often used to hold title to real estate owned by a married couple. This allows the property to pass to the surviving spouse on the death of the first spouse. The surviving spouse will need to file the deceased spouse’s death certificate in the land records, but probate is not required to clear title to the real estate.
Pitfalls of Using Joint Tenancy to Avoid Probate
Joint tenancies are relatively inexpensive. Most attorneys would charge a few hundred dollars to prepare a deed to joint tenants. For do-it-yourselfers, online deeds may cost a little less. But, as is the case with many situations, the cheapest route isn’t always the best. In fact, it can be dangerous to rely on co-ownership alone to avoid probate. Here’s why:
- Each owner has immediate rights to the jointly-owned assets. For example, each owner of a co-owned bank account can withdraw the entire account. This doubles the risk to the account.
- Titling the assets jointly opens the door to claims of co-owners, their creditors, and, in the event of a divorce, spouses of the co-owners. In places the assets in jeopardy if one of the owners incurs significant debts or is involved in a lawsuit.
- Joint tenancies can make it hard to coordinate a person’s affairs at death. If most of the assets pass automatically to the surviving owner(s), there may not be enough left over to pay taxes or debts or settle the affairs of the deceased owner.
- Joint tenancies can have bad tax consequences. The act of naming another owner is usually considered a gift if the tenancy is not revocable. Unless the other owner is a spouse, this gift is potentially taxable. For personal residences, adding someone other than a spouse as a co-owner can forfeit income tax exclusions that are available upon the sale of the home.
- Titling an asset as a joint tenancy can cause you to forfeit state and local homestead exemptions.
- If you live in a community property state, joint tenancies with someone other than a spouse can cause you to lose your tax basis step-up at death, resulting in a built-in tax liability attaching you’re your asset.
- Joint tenancies can make it difficult to deal with real estate in the future. Because the signatures of all joint tenants are generally required to transfer real estate, an uncooperative or incapacitated joint tenant can make it difficult to sell or mortgage the real estate.
- Joint tenancies don’t avoid probate as much as postpone it. Probate is postponed at the first owner’s death because there is a surviving joint tenant. But the last joint tenant to survive will hold the property in his or her name alone. Unless something is done to change this arrangement, probate is usually required after the death of the surviving joint tenant.
For these reasons, joint tenancies are usually not the best tool for avoiding probate. Because a living trust provides the probate avoidance benefit while avoiding these pitfalls, it is usually a better choice for avoiding probate.