Estate planning attorney explaining joint tenancey before signing a contract housing estate in office. Joint tenancy concept.

The Trouble with Joint Tenancy

Although Joint Tenancy offers some short-term conveniences, in the long run it poses a host of problems that can cost you and your loved ones the expense and headaches you thought you were avoiding.

For the vast majority of American Couples, “Till Death Do Us Part” also means, “Till Death Do We Hold Property in Joint Tenancy“. Joint tenancy happens almost automatically among married couples. When you and your spouse open a checking account, buy a car, purchase a home, or acquire just about any other asset you can think of, the first – and usually only – impulse is to put the title in both of your names as Joint Tenants. Married couples aren’t the only ones relying on Joint Tenancy. This ownership strategy is widely use by friends, life partners, parents, and their children.

Why is Joint Tenancy so frequently used? Many have heard it is a cost-free replacement for a will and that it avoids probate. These consumers focus on the fact that at the death of one of the owners, Joint Tenancy – more precisely, Joint Tenancy with Right of Survivorship – immediately passes full ownership of an asset to the surviving Joint Tenant by operation of law. It may circumvent probate and avoid the need for a will, at least for the moment.

What many people overlook is the fact that Joint Tenancy only temporarily avoids probate. It also brings with it a slew of problems that overcome any short-term convenience it provides. In fact, Joint Tenancy can end up costing you – and your loved ones – countless expenses and headaches you thought you were avoiding.

Here Are Just a Few of the Disastrous Consequences

  • Joint Tenancy may avoid probate at the first death, but upon the death of the surviving Joint Tenant, the entire estate will have to pass through probate.
  • Joint Tenancy means that the first person to die loses all control over to whom or how his or her assets will ultimately be distributed.
  • When the Joint Tenants aren’t husband and wife, gift taxes may be due.
  • Joint Tenancy exposes one Joint Tenant to the financial risks, liabilities, and other potential problems created by the other Joint Tenant.

Let’s take a closer look at some of these areas and how they may affect you.

Losing Control

Today more Americans are involved in second marriages than in first. And often, remarriage means that either one or both partners have children from a previous marriage. Whenever a parent holds property in Joint Tenancy with a spouse, the children are effectively disinherited. That’s one reason why parents with children from a prior marriage should rarely, if ever, own property in Joint Tenancy with a new spouse. Instead, remarried parents should choose ownership strategies that will help ensure their children are well provided for in the event of their death.

Even when children from a prior marriage aren’t a factor, you may want to think twice about whether you want to give up total control over how your assets are distributed at your death. Since many widows and widowers will eventually remarry, there’s a strong likelihood that whomever your spouse may remarry will be the ultimate beneficiary of your estate. For some people, that’s of little concern, but most of us would rather see our assets go to family or someone we know, rather than some stranger we’ve never met.

Joint Tenancy and Gift Taxes

Joint Tenancy isn’t always used in married couples, it can be used as a method of ownership between non-spouses. Friends can buy property together, an aging relative may add a younger relative on a property or cash account, or parents may make their children Joint Tenants with them on everything from cash accounts to cars to the family home. Unfortunately, the government takes a dim view of these transactions and can consider them to be gifts, not estate planning strategies. Many are shocked to discover that the steps they’ve taken to avoid wills and probate will end up costing them much more than it saves. Here are a couple examples.

  • A non-spouse is added to the title of a property as a Joint Tenant. The government deems the addition to be a gift. Gift taxes will become due, and the donor – the person presumably making the gift – will usually be liable for the taxes. (Under extreme circumstances, the person receiving the gift may become liable.) How much gift tax is due and when it becomes due depends on the asset.
  • An elderly relative adds a younger relative to their checking account, savings account, and other cash accounts for convenience. If the new Joint Tenant withdraws money strictly for the use of the original owner, then no gift taxes are due. But if he or she withdraws money for personal use, the original owner may have to pay gift taxes on that amount.

The gift tax situation is even more dire when real estate is involved. At the time a new Joint Tenant – who is not the spouse of the original owner – is added to the title of real property, the government considers the transaction as a gift. Gift taxes may then be due on the portion of the property the new Joint Tenant receives. For example, if a father decides to add his son as his Joint Tenant on his personal residence, the government will view that as his son receiving a gift equal to half of the home’s value and demand the father account for such gift taxes accordingly.

Of course, there are some exemptions available for gifts. Each year you may give away up to the annual gift exclusion per individual – and to as many individuals as you want – with no gift taxes due. So, in many cases, adding someone’s name as Joint Tenant to your checking account or real property may not require you to part with cold hard cash. However, even if your gift falls within the exclusion amount, you still must report it on your federal gift tax return.

Exposure to Risk

When you own property with a Joint Tenant, each of you own half of the asset. That means you effectively lose control of half the property. Whether the Joint Tenant is your spouse or someone else, the idea of potential loss can be frightening. Half of your assets held in Joint Tenancy could be lost as a result of:

  • Your Joint Tenant’s bad debts, back taxes, or bankruptcy
  • Your Joint Tenant’s divorce
  • Lawsuits or damage awards filed against your Joint Tenant

More than exposure to risk, Joint Tenancy also deprives you of the day-to-day control in managing your own asset. When you own a property with a Joint Tenant:

  • You may have to obtain your Joint Tenant’s consent before you sell, pledge as collateral, or engage in any other transaction involving your property.
  • You may have to obtain the approval of your Joint Tenant’s spouse before you can dispose of your property.
  • Your asset may fall under the jurisdiction of your Joint Tenant’s living probate, if your Joint Tenant becomes incapacitated through illness or injury.
  • If your Joint Tenant is a child, your shared property may be the subject of guardianship hearings.
  • If your Joint Tenant is a child, you run the risk that his or her financial inexperience, emotional immaturity, or the inevitable mistakes that are part of the growing experience, may have a disastrous financial impact on your shared asset.
  • Liquid assets – such as cash accounts – can be depleted by your Joint Tenant without any safeguards to protect you.

Alternatives to Joint Tenancy

Fortunately, there are several alternatives to Joint Tenancy. You don’t have to share your property; you can own it solely in your name. In Michigan, there is an option to seek the special creditor protection spouses receive under tenants by the entirety. This option avoids some of the pitfalls of Joint Tenancy.

However, the options above are never a replacement for the thoughtful estate planning that a qualified estate planning attorney can provide you. In fact, all the objectives you may try to achieve through Joint Tenancy can be achieved more effectively through a Lady-Bird Deed or Revocable Living Trust.

With a Revocable Living Trust, you can control exactly how your estate is distributed. You can designate who your beneficiaries are, when they will receive your legacy, and how they will receive it. You can also ensure that children from another marriage or children who have special needs receive fair treatment from your estate.

  • Reduce your estate taxes or eliminate them completely.
  • Take advantage of all other tax breaks to which you might be entitled.
  • Retain complete control over your assets while you live.
  • Put your legacy out of the reach of your heirs’ predators, creditors, and other seeking a piece of your estate.
  • Choose when, where, and how you will make gifts to friends, family, and worthwhile organizations.
  • Enjoy peace of mind in the knowledge that you can make provisions for your care should injury, illness, or some other incapacity make you unable to do so for yourself.

Talk to an Experienced Michigan Estate Planning Attorney Today

A home is the biggest investment most people will ever make. Whether you own one house or an assortment of properties, you need a customized plan to ensure that you and your heirs get the most out of your legacy. Biddinger & Estelle, PC has years of experience helping Michigan residents protect their assets. Send us a message online or call us at (989) 872-5601 today to schedule your initial consultation.

Michelle P. Biddinger
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