The Pitfalls of Joint Tenancy

Do not give away your goods until you understand your state laws.

Do not give away your goods until you understand your state laws.

One way many people use to try to avoid probate after death is joint tenancy, which is a way to own property with someone else. Joint tenancy – also known as survivorship – is a legal term that means, basically, co-ownership. If you and your spouse buy a house or automobile in both names and one of you dies, the property then automatically falls into the hands of the survivor who has the name on the property.

Although joint tenancy has its advantages, it also has some pitfalls that are wise to consider before developing this legal relationship.

First, it may be expensive to create a joint tenancy. In some jurisdictions, if one of the owners dies, jointly-held property might defeat the claims of creditors of the deceased co-tenant, or at least make that person’s life more difficult. Additionally, in some cases, the creation of a joint tenancy may create a taxable gift. For smaller estates, however, this tax situation does not apply.

But, other situations can apply to all joint tenants. For instance:

  • If you’re in a shaky marriage, it would not be wise to enter into a joint tenancy. In most states, your individual property becomes marital property once transferred into joint names and could impact your rights during a divorce. If you live in a “community property” state, however, this situation would not affect you.
  • If you do not want to lose control of your possessions, don’t share them. When you give someone co-ownership, you also give them co-control.
  • If your co-owner becomes legally incompeltent to make decisions, part of the property may go into a guardianship, making it difficult to sell a house or a portion of a portfolio.
  • If your partner in co-ownership is in debt, creditors can lay claim to a portion of that property that is co-owned. A lien on a portion of a home would make it very difficult to sell.
  • If you grant part ownership in any property to your spouse or friend and later part because of disagreements, you cannot take back their portion of a property. Regardless who paid for either half of the property, the property belongs to two people.
  • If you plan to use joint tenancy to avoid probate, this means that everything you own would need to be jointly owned. Basically, there is no way to avoid probate with joint tenancy as a sole means.
  • Some states automatically freeze jointly-owned accounts upon the death of one owner until the tax collector can examine them. So, don’t count on the ability to gain access to, or to sell, certain jointly-owned properties until you know about your limitations.
  • If you plan to develop a trust, a joint tenancy may limit your tax saving capabilities. Always talk with a resident state attorney before developing a joint tenancy.

Although joint tenancy may provide a cozy solution for many people, in many cases this co-ownership situation is not productive tax-wise nor does it offer an alternative to a will. Learn the laws of your resident state first, before you make plans to give away half of your property, even if you plan to give it to a trusted relative. Learn about all the pitfalls before you sign your name to joint tenancy, as you may be walking into a situation that could hurt more than help.

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