Joint Tenancy is NOT an Estate Plan Substitute

We have previously posted about holding property in Joint Tenancy and the right of survivorship that accompanies this method. However, a matter we stress with our clients and their families is that joint tenancy is not a substitute for a proper estate plan. At most, it's a band-aid - a temporary "fix" of a large, yet totally avoidable, problem.

Before going further, here is a quick refresher for joint tenancy: it's a way of holding title between two or more parties wherein the interest of the party to die first, automatically, that is by operation of law, passes on to the surviving joint tenant rather than to their heirs. This method of holding title is most often used by spouses when they get married or buy property. Based on that explanation, I'm sure the question has come to your mind if you already know our view on estate planning, "Why would I need to put a property in trust if joint tenancy solves the problem and avoids probate at my death?"

There are five (5) big reasons why relying solely on joint tenancy is a bad idea that we'll be covering, but they mostly build off of each other. However, as a disclaimer, while a major part of our practice is creating trusts for our clients, everything below are problems inherent to joint tenancy itself but that can ultimately be avoided utilizing a trust instead.

Temporary Fix

The first issue with trying to use joint tenancy as an estate plan substitute should be fairly obvious, and that it is a temporary fix. If a married couple hold property in joint tenancy between themselves, the joint tenant titling only matters so long as both are alive and means nothing after one of them passes away. Yes, the survivor receives the interest held by the decedent co-owner at death but being the sole-survivor of a joint tenancy simply means the property is now in your name alone as if you always held title alone.

Add Another on Title

Your next thought might be to add someone else on title with you, such as a child. However, that carries its own issues. First, and most importantly, are the tax concerns. Transfers of property, even gifts, means the county assessor can reassess the property for new (higher) property taxes on the transferred portion. Transfers from parents to children are exempt (as are transfers in and out of a trust), but unless you get remarried and add the new spouse to title or you add a grandchild on title (where the intervening parent has passed away), then the county is going to reassess for higher property taxes on what was transferred.

Next, there are the capital gains taxes to worry about. If you sell property for more than you paid to acquire it, that gain may be subject to a tax between those numbers. If your spouse passes away, then their tax basis (think the amount paid to acquire the property to begin with) will step-up to the fair market value as of their date of death meaning your capital gains tax burden if you sell the property will be lessened, but that only happens at death, not on a transfer or gift. If you add your child on title with you, then their tax basis is the same as yours meaning their capital gains tax would be based on what you paid to acquire the property, not the value of the property when they received it - no step-up in tax basis.

At least you may not have to worry about gift taxes since, even though the yearly gift tax exemption level is $16,000 for 2022, you also have a lifetime gift tax exclusion level equal to that of the federal estate tax level, $12.06 million as of 2022. Watch our video on the new 2022 rules on gift and estate taxes if you want some more detail.

Liability of a Co-Owner

To continue the thought of adding another to the title though, adding someone on title means you've brought them, and their troubles, along with you. Of course, not to say your children are troublesome, but having property in one's name means there is something for creditors or lawyers to latch onto. Liens for that person's debts could now be put on the property. If the person is in, for example, a car accident and a lawsuit is filed, then your property may now be dragged into the mix.

Simultaneous Deaths

Fourth, we have another issue that we might not typically think of - simultaneous deaths. What if there is a car accident, a fire, or some other tragedy and the co-owners are together? If you're holding title with your spouse, then the chances of you two being together most of the time is likely high. What happens if co-owners of a property in joint tenancy die at the same time?

The answer is two-fold, but to be brief, first we need to determine who died first and how far apart were the death (as in whether they were truly simultaneous). If one person survives the other by at least 120 hours (5 days) then they will be considered the survivor and thus the sole owner under the law. However, if the parties both died within that 120 hours or 5 days window, then there is no "survivor" at law and thus each co-owner's respective estates "retain" the property and their respective heirs inherit their interests in the property, effectively acting as if the property was held as tenants in common, rather than joint tenancy meaning potentially two (2) probate cases and all the headaches that follow. This is all according to the Uniform Simultaneous Death Act.

Revocable Transfer on Death Deeds

The final issue we’ll to touch on is a potential "solution" after a sole survivor remains - revocable transfer on death deeds. We have already done a deep dive on these in a video but these carry their own issues: they're part of the chain of title on the property meaning they are a matter of public record; establishing one means you need to take the time to draft the deed, execute it correctly; record it with the county and do so every time you wish to change your beneficiary or if your beneficiary predeceases you; and they are ridged in who you can grant property to.

Everything discussed above can be overcome or outright avoided by establishing a revocable living trust. A proper trust will have safety net language for every situation I've discussed; capital gains, property and gift taxes won't be a problem; estate taxes can even be mitigated if the estate is over $12.06 million; beneficiary troubles won't affect your property while it remains in trust; simultaneous deaths will be accounted for in the trust provisions and won't force the property into probate; your distribution remains private as title will only reflect the existence of a trust, not that what it contains; the trust should account for "what-if" scenarios such as a beneficiary predeceasing you; and, finally, the trust is freely amendable, changeable and revocable.

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