The risks of holding assets as joint tenants in order to avoid probate

Owning assets jointly with one or more children or other individuals is viewed by some as a simple informal estate plan that can avoid probate and can even avoid the expense associated with setting up a formal plan. There are advantages and disadvantage is to owning assets jointly of which you should be aware.

Advantages

Joint ownership has two potential advantages–convenience and probate avoidance. If you hold title to property with a child or another individual as joint tenants with right of survivorship, it means that when you die the property is transferred to the surviving joint tenant automatically without having to go through any court probate proceedings. You don’t need a will or trust.  The surviving joint owner just needs to extinguish your ownership interest in the asset in the streamlined manner available, such as recording of an affidavit of termination of joint tenancy for real estate and the presentation of a death certificate to the financial institution for bank accounts and the like.

Disadvantages

While joint ownership provides simplicity, it can also create problems. These include the following:

1. Incurring unnecessary Taxes. Adding another name to the title of an asset may constitute an immediate gift of one half of the value of the property. When you die, the surviving owner will take a carry-over cost basis on the property as to the gifted one-half and a stepped-up basis as to the other half that was received upon death. If, on the other hand, the receiver takes the entire property upon death there would be a step up in basis as to the entire value of the property. The carry-over basis could lead to additional capital gain on the asset and capital gains taxes being incurred.

2. Loss of control. You as co-owner now will lose some of the control over the property because it would take the consent of the other co-owner to sell or borrow against the property in certain instances, especially if the asset is real estate.

3. Exposure to creditor claims and mismanagement.  Joint ownership exposes the property to claims by your co-owner’s creditors or former spouses in divorce. If it is an asset like a bank account, your co-owner also has full access to the account and at risk to your co-owner’s financial mismanagement.

A well-thought-out plan, such as a revocable living trust, can avoid the problems that arise with joint ownership, this also without the need for probate upon your death.

Each person’s estate plan is unique to himself or herself and what might be appropriate for your neighbor or friend does not necessarily make it appropriate for you. We believe that estate planning should start with protecting you and your family. It should allow you to control what will happen to your assets.  It should allow those you leave behind to handle your affairs and continue their lives with a minimum of upset, expenses and dispute. If you share these beliefs, we would be happy to work with you, take the time to really understand your goals and concerns, and assist you in any way we can to implement a plan that works best for you.

Jon