Joint Tenancy-Don’t Do It
Joint tenancy is owning something–anything–with another person who is or is not related. It could easily prove to be your worst financial nightmare. Many Americans own at least their house and a bank account in joint tenancy.
The joint tenancy nightmare begins innocently when you open a bank account or buy your house. The banks, title insurance companies, brokers and everyone else you have financial dealings with just assume that you want to take ownership as a joint tenant with someone. If you are married, the assumption is automatic. They don’t even bother asking you. After all, doesn’t every husband and wife own all their property jointly? If you try to open a bank account and tell the new accounts person that you don’t want the account to be held with your spouse as a joint tenant, the stability of your marriage is immediately in question.
Joint Tenancy-Poor Man’s Estate
Often people innocently choose to use joint tenancy in an effort to avoid probate. Joint tenancy is often called the poor man’s estate plan, because when one joint tenant dies, the surviving joint tenant automatically owns the property. This avoids the time and cost of going to court for probate. In reality, probate is not avoided. It is only postponed. The property escapes probate when the first joint tenant dies, but it will be probated when the surviving joint tenant dies. Probate is no fun, but it is not the real danger.
The use of joint tenancy by a husband and wife is appropriate in some cases, but in others it is a disaster waiting to happen. For instance, if you own a small business that subjects you to liability, in most states it would be better to hold business property in your name and personal property in your spouse’s name. That way if your business is sued, you won’t lose all of your personal property. While you may desire to share everything equally with your spouse or partner, it probably isn’t the best business strategy.
If you decide to use joint tenancy, it is important to know exactly what you are doing and establish the tenancy correctly. Owning property, such as stocks and bonds, in two names with the terms “and/or” or “or” in between the names is an indication that the property is owned in joint tenancy. If there is only an “and” between the names, then the benefit of joint tenancy is lost. It is better to use the phrase “joint tenants with rights of survivorship” after the names on a stock certificate or signature card. This phrase absolutely establishes joint ownership.
Joint Tenancy-A Bad Idea
More than two people can be involved in a joint tenancy. While this is lawful, it is not a good idea. It is common to have parents put one or more of their children’s names on the house as joint tenants. They think this will help them pass property easily without probate. Sure it passes easily, but it can also be costly or easily lost. You should never put your kids’ names on anything you own. Kids are like yogurt–you can never tell when they are going to go bad. Even if your children are the best kids in the world, don’t put their names on the house. This is the real danger.
You could easily lose your home because you have put a child’s name on the deed with you and your partner. Joint tenancy ownership leaves property wide open to attack by lawyers or the IRS. If the child gets into tax trouble, the IRS can seize and sell the entire property to satisfy the taxes owed. Yes, the IRS can take everything, including your interest in the property, to satisfy a tax judgment against any one of the joint tenants.
As an Example. . .
My friend Tim was a great son to his parents, and they were very proud of him. He fancied himself as a real entrepreneur. However, he certainly wasn’t a very good businessman because every business he started failed.
Years earlier, in order to avoid probate, Tim’s parents had put his name on the deed to the family home. When Tim’s business failed and he declared bankruptcy, his one-third share of the family home was included as part of his bankruptcy estate. His parents had to pay either the court a third of the home’s value or sell the house to “cash in” Tim’s interest. The family home had to be sold.
This is just one tragedy that can occur with joint tenancy. Bankruptcies, judgments, IRS troubles, and divorces, are some of the other tragedies that might strike one of the joint tenants and threaten your interest in the jointly-owned property. When a tragedy occurs, it often costs the individual everything he or she owns. This includes his or her interest as a joint tenant, and your interest is also threatened, if not lost.
The potential loss of the asset through the tragedy of another joint tenant is only one of a string of problems caused by joint ownership. Income tax, gift tax, and estate tax laws can also threaten every joint tenant relationship.
The gift tax laws loom as an unseen destroyer of families that use joint tenancy. When you put anyone’s name on an asset as one of the joint owners, you are making a gift. The IRS permits you to transfer a specific amount (it changes all of the time, but it is now $14,000) in gifts to an individual each year before any gift tax problem occurs. You undoubtedly feel like it would be impossible for you to ever get caught in a gift tax problem. After all, you only have $3,000 in total savings. How could you possibly ever give anyone more than $14,000? The gift tax trap sneaks up on you real fast. After your spouse dies, it may almost be a natural reaction to put a child’s name on the house deed. When you put the child’s name on the deed, you are giving the child half of the house. On a $500,000 house, the IRS says the gift is $250,000. The tax on your “gift” will be over $100,000. You will pay it out of your pocket, or you will lose the opportunity to pass $250,000 tax free at your death.
The gift tax trap isn’t the only tax problem for joint tenants. You will probably live in your home until you die, and then your child will receive the house automatically–no probate–as a result of the joint tenancy relationship. Sound good? Not really. When your son or daughter sells the house after your death, they will be forced to recognize a substantial income tax gain on the sale. Your child will actually pay income tax on the value of your interest in the home when the home is sold after your death. The entire income tax problem (potentially over $100,000 in this case) could have been avoided if you hadn’t put your child’s name on the deed. The single mistake of putting the name on the deed can cost $100,000 in income taxes in addition to the over $100,000 already owed in gift taxes. This is an expensive mistake.
Your child would have been much better off inheriting your house instead of receiving his or her rights to the house through the joint tenancy relationship, even if it goes through probate. The inheritance could have come through a trust, will, or even an intestate proceeding and both the gift tax and the income tax would have been totally eliminated for the average family. If it came through a trust, the probate would also have been eliminated.
On the Road to Ruin
Not only can a joint tenancy relationship prove to be expensive, it can ruin personal relationships. As soon as you include someone as a joint owner of an asset with yourself, you have lost exclusive control of the asset. The other joint owner’s signature will be required if you want to sell the asset.
Suppose your home is too big for you to manage and you decide to sell it. If your daughter’s name is on the deed and she doesn’t want to see the house sold, the only way you can force her to sell the house is to sue her. You would have to sue your own daughter. Such a suit doesn’t help family relationships, but I have seen it many times.
There are many other reasons not to use joint tenancy. Don’t let the banker, title insurance company, or anyone else automatically pin a joint tenancy relationship on you.
A complete discussion of joint tenancy relationships and step-by-step instructions to help you avoid joint tenancy disasters can be found in the book, Protecting Your Financial Future, by Lee and Kristy Phillips.