Joint tenancy ownership of assets is sometimes called “the poor man’s will.” Indeed, joint tenancy ownership can be a good substitute for a will in some circumstances. However, joint tenancy is far from a panacea for a comprehensive estate plan, and without careful consideration of the desired result, joint tenancy could result in some unintended consequences.
Joint tenancy is the ownership of an asset by one or more persons, each of whom is the equal owner of the undivided whole. The “estate planning” feature is that upon the death of one joint tenant, the surviving joint tenant becomes the owner of the asset. Because title to the asset passes by operation of law, a will or trust is not necessary to transfer title at death of an asset owned in joint tenancy.
Complications can result when a joint tenancy account is created in order to assist the account holder to pay his or her bills. So called “convenience” accounts often provide an opportunity for the purported “assistant” to help himself or herself to the funds in the account, whether before or after the death of the account holder. One problem is that the addition of a person as a joint tenant is presumed to be a gift, a presumption that can only be overcome by clear and convincing evidence by the party claiming that there was no gift. Thus, while a person may have intended that a bank account would pass as part of his or estate, the account will become the property of the surviving joint tenant unless it can be proven that the joint tenancy account was established solely for convenience. The better way to give another person access to an account for the convenience of the account owner is to give that person a durable power of attorney that will provide access to the account. The power of attorney will terminate upon the death of the principal, thereby terminating the agent’s access to the account.
Tax treatment of joint tenancy assets or accounts can also complicate matters. One result of the presumption that a gift is made upon the creation of a joint tenancy is that gift taxes may result. For example, the creation of a joint tenancy in real estate is an immediate gift (the reason being that the gift has been completed because the grantor cannot take the property back unless the grantee signs a deed conveying title). On the other hand, with respect to a bank account, a gift does not result unless the donee makes a withdrawal from the account and uses the funds for his or her own personal benefit, thereby completing the gift. In any event, careful record keeping is essential in order that tax issues can be identified and gift tax returns filed if necessary.
If a husband and wife own all their assets in joint tenancy, and their combined net worth exceeds the estate tax exclusion equivalent amount ($2,000,000 per person in 2007), their estates may incur an otherwise avoidable estate tax. Consider the following example: husband and wife have a combined net worth of $4,000,000. Upon the death of the first spouse, the surviving spouse will become the owner of all the assets. Upon the death of the second spouse, an estate tax will be due for all assets in excess of $2,000,000. In our example, the federal estate tax on the estate of the second spouse to die would be $780,000. Had the couple each held one-half of their assets in separate living trusts, rather than relying on joint tenancy to accomplish the transfer, the federal estate tax would have been avoided in its entirety.
While joint tenancy ownership can be beneficial, and may well be appropriate in certain circumstances, its use must be carefully planned to avoid any number of adverse consequences. Please do not hesitate to telephone us if you have any questions regarding joint tenancy or your estate plan generally.