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| Pitfalls of Joint Tenancy | |
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Joint tenancy is
one of the most common forms of asset ownership. If you own a bank
account, brokerage account or perhaps real estate with one or more
persons, then you and they may be "Joint Tenants." The full
legal expression for this form of ownership is "Joint Tenants with
Rights of Survivorship (JTWROS)." [Although its primary application
between married couples is found in "common law" states,
residents of "community property" states also should understand
JTWROS given the mobile nature of our society.] Rights of Survivorship When one or more persons hold title to an asset as Joint Tenants, each of them owns a 100 percent interest in the asset. When one Joint Tenant dies, each of the remaining Joint Tenants continues to own a 100 percent ownership interest. Ultimately, the sole surviving Joint Tenant owns the entire asset. This Right of Survivorship is one of the attractive legal features of JTWROS. Not surprisingly, many JTWROS relationships are between family members. It just seems like the natural thing to do and, especially between spouses in a long-term marriage, it reflects the financial partnership of their commitment. Nevertheless, as with most things in life, there are advantages and disadvantages to this form of asset ownership. Advantages One key advantage of JTWROS is the ease by which it is created. Whenever married couples acquire an asset together, the title typically is designated as JTWROS. In fact, creation of the JTWROS ownership is so common it could just as easily be called "Joint Tendancy." When original title is taken as JTWROS likely there is no fee associated with creating the ownership form. If a Joint Tenant becomes incapacitated, probate may be avoided regarding any JTWROS assets. For example, the healthy spouse may continue to draw on the JTWROS bank account without interference because of their concurrent 100 percent ownership rights. For this reason many widows, widowers and other singles may add trusted family members or friends as Joint Tenants to their assets. Again, this is easy, convenient and inexpensive to establish. Upon the death of a Joint Tenant, probate will be avoided as long as there is at least one surviving Joint Tenant. This may result in substantial savings in terms of professional fees and court costs; as well as avoiding the time delays typically associated with probate court proceedings. Disadvantages Sometimes apparent legal simplicity may lead to unintended legal complexity. So it is with JTWROS. Before you decide to create or continue JTWROS ownership, consider the following potential pitfalls. JTWROS may avoid probate upon incapacity and even at death…but only if there is at least one living Joint Tenant who also is not incapacitated. In order to ensure this, however, most people add non-spouses as Joint Tenants. Whether it is children, siblings or friends, this can turn JTWROS into legal dynamite. Once you add someone as a Joint Tenant to a given asset, they also assume a 100 percent ownership interest in that asset. What you may have intended merely as a convenience has instead subjected the control, use and enjoyment of the asset(s) to the potential liabilities of each Joint Tenant. These liabilities may include divorces, lawsuits, and creditors. Your plans for the eventual distribution of your assets may be lost through JTWROS ownership. For example, a Will, Revocable Living Trust or even an Ante-Nuptial (Pre-Marital) Agreement does not control assets held in JTWROS. Quite often assets passing to a surviving spouse later end up in JTWROS with a new spouse. That new spouse (and their children) ultimately may receive assets from the previous marriage instead of the children for whom they were originally intended. Similar disinheritance problems result in every blended family situation following divorce and remarriage. No discussion of JTWROS would be complete without mentioning its potential tax consequences. Depending on the total value of their estate, a married couple may forfeit in excess of $200,000 in federal estate tax savings by excessive JTWROS ownership. Certainly no one wants to make the IRS a major beneficiary of their life’s work. |
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