The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided by Carolina Family Estate Planning to Triangle-area financial professionals. If you are a financial professional that would like to learn more, please click here to request a subscription.
In Part 1 of this series we explained how Joint Tenancy with Right of Survivorship works. We noted that it is a form of asset ownership where each owner is deemed to own 100% of the asset, and whoever lives the longest gets the whole thing! We also introduced some of the pitfalls of owning things in this way, and began to explore two more potential pitfalls of joint ownership, and offer a possible solution.
In Part 2, we discussed these two pitfalls of joint tenancy:
(1) There is no control, and property may pass to unintended heirs.
(2) There are no planning opportunities.
There are two more problems of which your clients should be aware:
(3) Probate is at best delayed, not totally avoided.
In spite of the concerns already discussed, some advisors continue to recommend joint tenancy! Why? The major reason given is because joint tenancy property bypasses the entire probate process. But this is not entirely true.
With married couples, joint tenancy does not avoid probate—it only delays it. Because joint tenancy passes outside all will or trust planning, it does avoid probate—on the death of the first spouse. When the second spouse dies, however, there will be a probate. In situations where both spouses die together, there will be at least one probate and perhaps two.
(4) For non-spousal owners, unintentional gift taxes and death taxes can be generated.
When non-spouses create joint tenancy, they often create a gift tax as well. Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property. The moment this is done, the transfer of property is often considered by the IRS to be a gift, and if the value is abouve $13,000 (in 2011) it will have to be reported to the IRS. In some cases, a gift tax may be immediately due.
When a non-spouse joint tenant dies, the surviving tenant gets the property. If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent’s will or trust says. The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax. Joint tenancy makes estate tax planning extremely difficult and may rob clients of the ability to reduce the estate tax burden imposed on their loved ones.
For many clients, the solution to all of these concerns is the creation of revocable living trusts, and the transfer of title to trust ownership rather than joint tenancy.