Estate Planning: Property Ownership & Joint Tenancy

By spending a little money and time on estate planning keep the courts and attorneys from deciding how an estate is divided after a person’s death.  By not having a plan, the end result can be that costs increase with delays and frustration for family members and loved ones.

The substantial benefits yielded by planning ahead of time include:

  • The opportunity to plan and arrange an estate in a way that will minimize taxes, decrease estate settlement cost, and leave more assets to family and loved ones.
  • The ability to accomplish goals and objectives for the distribution of assets.
  • Family members and loved ones can continue to benefit from a person’s knowledge and experience, even after they have passed.

Forms of Property Ownership

The form of property ownership can have an effect on how assets are distributed.

  • Community property is any property acquired in conjunction with a spouse during a marriage.  Exclusions to the community property rule include any gifts or inheritance received.  The community property can be distributed by will as the owner sees fit.  The will does not dictate how the other half of the community property is distributed as the surviving spouse still retains ownership in their half at one spouse’s death.
  • Separate property is all of the property that is not community property and held solely by the estate owner.  Distribution of this property is at the sole discretion of the estate owner during life or by will at death.
  • Joint tenancy with right of survivorship refers to non-community property that is owned or held by two or more people where all of the owners have an equal share in the property.  This type of tenancy can be terminated by any of the owners.  When a death occurs and joint tenancy is present, the surviving members receive the entire property without having to go through probate.  Even if the decedent declares in a will that his or her ownership goes to another person, their share goes to the joint tenant.
  • Tenancy by the entirety is similar to joint tenancy when death of one tenant occurs.  However, in some states, this option is available to some spouses.  In addition, it takes both tenants to agree to terminate the tenancy, unlike joint tenancy which only requires one party to terminate.
  • Tenancy in common gives the most flexibility in choice.  In this type of tenancy, each tenant in common owns an undivided interest in the property, but not necessarily in equal shares.  There is no right of survivorship and at death, the interest of the decedent is distributed according to the will.
  • Life estate and remainder interest is when the estate owner continues to have use of the property during their lifetime.  Once the estate owner passes, the remainder interest in the property goes to the remaining person or another party.  Since, technically, the estate owner has no interest in the property, at the time of death, the property passes to the remainder person.
  • A trustee holds title and is the token owner of trust property.  The beneficiary is the actual owner of any benefits that may arise from assets created by the trust.  According to the terms of the trust, at the passing of the trust beneficiary, equal division of the trust passes fitting to the terms of the trust.

Since this issue can be very complex and each state is governed by state statute, consult an attorney with questions pertaining to property ownership arrangements and any impacts this may have on estate plans.

Joint Tenancy

A joint tenancy is when two or more people hold an equal interest in property.  A will does not dictate what happens to one member’s part when they die, but rather their portion is split equally among the remaining members of the joint tenancy.  There are advantages and disadvantages to a joint tenancy.  

Advantages of Joint Tenancy

  • Avoidance of probate – The probate process is bypassed and title automatically passes to the surviving joint tenant.
  • Privacy – Publicity is avoided because probate records are usually open to the public.
  • Convenience – Bank accounts are often held in joint tenancy so that either tenant can withdraw funds.
  • Creditor protection – Many states prohibit creditors from having access to a joint tenancy account.
  • Tax savings – Some states provide income or state death tax savings on joint tenancy accounts.

Disadvantages of Joint Tenancy

  • Property cannot be transferred by will – Wills have no impact on joint tenancy property, even if a person changes their mind.  At death, the title automatically passes on to the surviving spouse.
  • Joint tenancy can effectively disinherit certain heirs – Certain heirs can be disinherited if a spouse remarries and establishes a joint tenancy with the new spouse.  If a couple does not have any children, the family of the surviving spouse may ultimately obtain all of the joint tenancy property leaving the deceased spouse’s family disinherited.  If the joint tenancy is entered into with an adult child, the other children may receive less than their equal share of the estate.
  • Gift tax consequences – If someone other than the spouse creates a joint tenancy with another person, a gift tax may be the result.  If the value of the assets is more than the annual gift tax exclusion of $14,000, then any amount over will be subjected to a gift tax.
  • Possible excessive estate taxation – Joint tenancy property can weaken the estate tax savings of a credit trust arrangement.  If a married couple holds assets as joint tenants, extreme estate taxation can result at the surviving spouse’s death.
  • Potential income tax consequences – If the property is sold after the surviving spouse receives full shares in the joint tenancy, a large step-up in costs basis may be incurred when they pass away leaving less for any surviving children or loved ones.

Since the decision whether to hold property in joint tenancy is a complex issue, consult an attorney before making any concrete decisions.

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