Sometimes people can get a little too cleaver in their attempts to avoid probate, and save some money in legal fees. One of the maneuvers we see quite a bit involves adding children, or other family members to accounts are joint tenants. Unfortunately, this maneuver can have real world impacts on you and your assets while you’re still alive.
What is a Joint Tenant?
A joint tenant is a means of holding title to property so that two or more people (the joint tenants) hold title together with “right of survivorship.” This means that the surviving joint tenant or tenants are entitled to the property upon the death of one joint tenant, without probate.
What are the dangers of Joint Tenancy?
There are several dangers with adding joint tenants to any accounts or property, and they all stem from this simple fact— When you add a joint tenant to an account or property, you are adding a new owner.
Here are some of the common issues we associated with this:
1. Capital Gains
If one person owns the property, at that person’s death, the property basis is fully stepped up to the value at the day of death. With a joint tenant, only the decedent’s half is stepped up. This will lead to significant capital gains taxes that would have been entirely avoided if the joint tenant has not been created.
2. Loss of Control
When you name someone a joint tenant to your property, you are making an immediate gift of one-half of that property to that person. This gives them ownership rights, and they could do things like block your ability to sell that property or even refinance it.
3. Creditors and Liens
When you take on a joint tenant, you’re also taking on that person’s liabilities. The property can become subject to the attachment of that joint tenant’s debts or tax liens. It’s also a little known fact that liens stick to property. Once you add them, if they had a lien, it would stick to the property and it would not come off, even if you took them off the title.
If you were to add a joint tenant, who later becomes divorced, that asset can end up in the middle of their divorce proceedings. Imagine your ex son or daughter-in-law forcing the sale of your home to settle, while you’re still living in it, to settle their community property claims. Sadly, this happens more often than you’d think.
5. Accidental Disinheritance
Joint property is not subject to a will or terms of a trust. Often parents will put one child on as a joint tenant on a property to make things like handling the finances simpler, expecting that child to share the property with their other children. However, legally, there is no obligation for that child to do so.