“Joint tenancy with right of survivorship” means that each person owns an equal share of the property. When one owner dies, that person’s share immediately passes to the other owner(s) in equal shares, without going through probate. We’ve all be told that joint tenancy is a simple and inexpensive way to avoid probate, and this is sometimes true. But the tax and legal problems of joint tenancy ownership can be mind-boggling. The dangers of joint tenancy include the following:
Danger #1: Only delays probate. When either joint tenant dies, the survivor — usually a spouse or child — immediately becomes the owner of the entire property. But when the survivor dies, the property still must go through probate. So joint tenancy doesn’t avoid probate; it simply delays it.
Danger #2: Probate when both owners die together. If both owners die at the same time, such as in a car accident, the property must still go through probate.
Danger #3: Unintentional disinheriting. When blended families are involved, with children from previous marriages, here’s what often happens: the husband dies and the wife becomes the owner of the property. When the wife dies, the property goes to her children, leaving nothing for the husband’s children.
Danger #4: Gift taxes. When you place a non-spouse on your property as a joint tenant, you make an immediate gift of one-half the value of the property. For example, when a mother retitles her $80,000 home in joint tenancy with her son, she has just given her son a $40,000 gift. The first $14,000 doesn’t count but the law requires that she file a gift tax return. Fortunately, she does not have to pay the taxes until she has used up her gift tax exemption.
Danger #5: Loss of income tax benefits. If a person inherits a home through a will or living trust, the heir can sell the property without paying any income tax. But when a property has been held in joint tenancy, the surviving owner does not get a step up in tax basis. This can be a costly mistake.
Danger #6: Right to sell or encumber. Joint tenancy subjects the property to each owner’s financial dealings. Either joint tenant has the right to mortgage or sell his half interest. However, what you are likely to find is that you cannot sell or mortgage the property unless the joint tenant will cooperate with you.
Danger #7: Financial problems. If either owner fails to pay income taxes, the IRS can place a tax lien on the property. If either owner files for bankruptcy, the trustee can sell that person’s interest in the home.
Danger #8: Court judgments. If either party has a judgment entered against him, such as from a car accident or business dealings, the holder of the judgment can and will execute the judgment against the home.
Danger #9: Incapacity. If either joint owner becomes physically or mentally incapacitated and can no longer sign his name, the probate court must give its approval before any jointly owned property can be sold or refinanced — even if the co-owner is the spouse.
Because of the tremendous risks, I suggest: “Never own property in joint tenancy!”
I invite you call for a free appointment to learn how you can protect your family and your assets. Also, if you have any questions or comments, you’re welcome to call me at 303-974-4400. I’ll be pleased to speak with you over the telephone without charge.