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.

More Pitfalls

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.

  1. IU not joint then what. I’m in a 15 year relationship and finding it now he owes and could have a lean against there land if something isn’t change. What kind of deed do I need protect my half of the land. He refuses to be bought out and I’m too old to move. It’s my mobile home in the land. What can I do

    • If you are not a joint tenant, then you are a tenant in common. You own a percentage of the property as a tenant in common, probably 50%. In a tenant in common you can do what you want with your part and the other person can do what they want with their part. There is not much you can do but buy the other person out to take their portion of the property.

  2. What if my daddy left me a IRA out of (5) children? An how would I found out it was only left to me with out out all the fuss?

  3. How else can you buy a house with your husband? We are looking at buying a house but with my husband elderly mom for qualifying purposes. What way should we do it if not joint tenant? Husband said once we close on our house his mom would just sign a quick claim Deed to give house to us and give up rights. Is this acceptable? If not how can we do this?

    • Jami,
      If your Mom is going to quitclaim her rights to the two of you, that is fine. You really only want to use joint tenancy with a husband and wife.
      You would need a separate trust to be able to hold the stock individually. You don’t have to have an A-B Trust but can set up a new single trust that has only the wife as the trustee.

  4. My wife and I have been to Lee’s Boot Camp and have a question. My wife owns shares of stock in her name. We recently set up a Revocable Living Trust for the two of us. Since our estate is not over 5.25 million dollars, we used the no-split trust. Can we get the stock into the trust without a joint tenancy problem or do we need the A-B Trust?

  5. It appears that the life estate and remainder man factors have been totally forgotten or simply ignored here.

    • Sterling,
      Since this article is about the issue with Joint Tenancy there was not a need to talk about life estates and remainder man factors. That is a side topic that is not used by most people and not something we felt needed to be addressed in this article.

  6. Lee,

    Thanks for answering questions.

    If a U.S. citizen buys property and mortgages it to build a house, then marries a non-U.S. citizen, but wants to make the property community property, which would mean the non-U.S. citizen is 50% owner, would that be subject to a gift tax, and as the spouse is not a U.S. citizen, would it be limited to an annual amount?

    This would be a house they both lived in. Is it better to wait till the spouse becomes a citizen?

    • David,
      You are limited to giving a non-citizen spouse only about $150,000, so it might be best to wait until the spouse becomes a citizen. Two US married persons can gift as much as they want back and forth. Putting the name of a non-citizen spouse on the deed as a joint tenant could be a real gift tax trap.

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