Attorney guest blogger Gregory Herman-Giddens discusses the implications of joint tenancy on estate planning.
Could joint tenancy, one of the most common forms of holding title to assets, lead to an estate planning disaster for your heirs? Joint tenancy, often called “joint tenants with right of survivorship,” is a form of holding equal interests in an asset by two or more persons. If one joint tenant dies, his or her share generally passes automatically to the other joint tenant(s) by right of survivorship.
Advantages of joint tenancy
- Probate avoidance: Title to assets held in joint tenancy passes automatically at the death of one joint tenant to the others. There is no need for a formal probate (unless all the joint tenants die).
- Convenience: Bank accounts held in joint tenancy can be withdrawn by any joint tenant. This may be an advantage if one party becomes incompetent due to an accident, a stroke, advanced age, etc.
Potential disadvantages of joint tenancy
- Loss of control: Your will (or trust) will have no effect on joint tenancy assets, even if you change your mind as to the persons you would like to receive your share when you die. Also, the entire asset may be available to the creditors of either joint tenant.
- Assets may not reach your children: Quite often assets passing to a surviving joint tenant spouse end up in joint tenancy with a new spouse. The new spouse may ultimately receive all of the assets rather than your children. Also, if the first joint tenant to die had children of a prior marriage, they can be easily cut out of any inheritance by the surviving joint tenant.
Potential tax penalties
- Gift tax penalty: The creation of a joint tenancy in some assets may be subject to gift taxation if the value exceeds the $13,000 annual gift tax exclusion. Gifts to one’s spouse are generally not taxable.
- Estate tax penalty: A “credit shelter” or “bypass” trust is often used to reduce or eliminate estate taxes for the children or other beneficiaries of a married couple with assets in excess of $1 million (for 2011). Holding assets in joint tenancy can prevent this type of trust from being effective by passing assets outside the trust.
- Income tax penalty: When appreciated assets are sold, capital gains tax is generally paid on the difference between the cost basis and the sales price. Assets included in one’s estate receive a new, stepped-up cost basis at the time of death – the value at which the assets are included in the decedent’s estate. If these assets are then sold at this higher value, there is no gain, and thus no income tax due. However, assets held in joint tenancy title receive only a partial step-up in basis, on the decedent’s share. If the decedent owns the asset alone, the basis of the entire asset will be stepped-up.
Dissolving an unwanted joint tenancy
Because of the many disadvantages of joint property, it is often advisable to terminate such ownership in favor of sole ownership or tenant in common ownership. For bank and brokerage accounts, this involves changing the title of the account and signing new signature cards or similar documents. Dissolving a joint tenancy in real property is generally done by creating a new deed by which the joint tenants transfer their interests to themselves as tenants in common.
However, changing of title to assets can have very serious tax and legal consequences and should be undertaken only after seeking professional advice.
Gregory Herman-Giddens is an attorney and president of TrustCounsel in Chapel Hill, North Carolina. His practice is concentrated in estate planning, probate, trust administration, asset protection and taxation. Greg is admitted to the Bars of North Carolina, Tennessee and Florida. He is a Board Certified Specialist in Estate Planning and Probate Law (North Carolina) and a Certified Financial Planner. For more from Gregory Herman-Giddens, visit the North Carolina Estate Planning Blog.