Tax, Estate Planning, Probate & Elder Law Center

Your Information source for tax, wills, trusts, offshore asset planning, estate tax minimization, powers of attorney, living wills, health care directives, special needs trusts, asset protection, charitable giving, guardianship, succession planning, retirement and estate administration.

Problems with Joint Tenancy Property

This post was written by Parag Patel, Attorney on January 25, 2008
Posted Under: Estate Planning and Probate

Could joint tenancy, one of the most common forms of holding title to assets, lead to an estate planning disaster for your heirs? Joint tenancy, often called “joint tenants with right of survivorship,” is a form of holding equal interests in an asset by two or more persons. If one joint tenant dies, his or her share generally passes automatically to the other joint tenant(s) by right of survivorship.

Advantages Of Joint Tenancy

Probate avoidance: Title to assets held in joint tenancy passes automatically at the death of one joint tenant to the others. There is no need for a formal probate (unless all the joint tenants die).
Convenience: Bank accounts held in joint tenancy can be withdrawn by any joint tenant. This may be an advantage if one party becomes incompetent due to an accident, a stroke, advanced age, etc.
Potential Disadvantages Of Joint Tenancy

Loss of control: Your will (or trust) will have no effect on joint tenancy assets, even if you change your mind as to the persons you would like to receive your share when you die. Also, the entire asset may be available to the creditors of either joint tenant.
Assets may not reach your children: Quite often assets passing to a surviving joint tenant spouse end up in joint tenancy with a new spouse. The new spouse may ultimately receive all of the assets rather than your children. Also, if the first joint tenant to die had children of a prior marriage, they can be easily cut out of any inheritance by the surviving joint tenant.
Potential tax penalties:
Gift tax penalty: The creation of a joint tenancy in some assets may be subject to gift taxation if the value exceeds the $12,000 annual gift tax exclusion. Gifts to one’s spouse are generally not taxable.
Estate tax penalty: A “credit shelter” or “bypass” trust is often used to reduce or eliminate estate taxes for the children or other beneficiaries of a married couple with assets in excess of $2 million. Holding assets in joint tenancy can prevent this type of trust from being effective by passing assets outside the trust.
Income tax penalty: When appreciated assets are sold, capital gains tax is generally paid on the difference between the cost basis and the sales price. Assets included in one’s estate receive a new, stepped-up cost basis at the time of death – the value at which the assets are included in the decedent’s estate. If these assets are then sold at this higher value, there is no gain, and thus no income tax due. However, assets held in joint tenancy title receive only a partial step-up in basis, on the decedent’s share. If the decedent owns the asset alone, the basis of the entire asset will be stepped-up.
Dissolving An Unwanted Joint Tenancy

Because of the many disadvantages of joint property, it is often advisable to terminate such ownership in favor of sole ownership or tenant in common ownership. For bank and brokerage accounts, this involves changing the title of the account and signing new signature cards or similar documents. Dissolving a joint tenancy in real property is generally done by creating a new deed by which the joint tenants transfer their interests to themselves as tenants in common.

However, changing of title to assets can have very serious tax and legal consequences and should be undertaken only after seeking professional advice.

Reader Comments

Hi,

My sister and I currently own our home (joint title). I don’t want to be in the title anymore, but I am not sure what will be the consequences for me….will the bank turn around and charge me for the loan?

Please advise.
Thanks,
Flor

#1 
Written By Flor on October 19th, 2009 @ 11:44 am

I presently own my own home with husband and I have a joint tentant home with my sister who also lives in that home. I would like to understand the capital gains on both homes when sold. Also, how do you find out if there are judgements on the joint property with my sister. I am concerned if she leaves the state and I am not able to contact her if and when I need to to complete the sale of property.

#2 
Written By Cindy on July 23rd, 2013 @ 10:41 am

I was joint owner of a house with my father who recently died. is the house considered part of the estate for NJ estate tax

#3 
Written By Anonymous on September 24th, 2013 @ 2:57 pm

My wife and I own a two-family with mom. We live in one unit and the other unit is rented. Mom recently gave away her POA and is in a nursing home. The POA is telling us that the potential rent that could be collected on our unit must be included in all calculations when splitting the amount of rental income between the owners. We and mom were only splitting what was actually rented (the one unit). What is the legal precedence in this situation?

#4 
Written By Michael on October 26th, 2013 @ 2:47 pm

Add a Comment

required, use real name
required, will not be published
optional, your blog address