Jointly owned house in North Carolina

Joint property, also known as joint tenancy, is nothing but a planning pitfall.  Although joint tenancy has been assailed for years by many estate planning experts, it remains—unfortunately—a very popular form of property ownership.  Joint tenancy is a pitfall because you cannot control where such property passes after your death.

In joint tenancy, each person owns the entire asset, not a part of the asset.  This legal fiction of two or more people owning 100 percent of the same asset is derived from the full name given to joint tenancy: joint tenancy with right of survivorship.  “Right of survivorship” means that whoever dies last owns the property.  The previous joint tenants merely had the use of the property while they were alive.

Joint tenancy property is “uncontrollable.” Even if a joint tenant intends to have his or her share pass to loved ones, the property is not controlled by the instruction in the joint tenant’s will or trust.  Joint tenancy automatically passes to its surviving owners automatically by operation of law.

Property that is owned in joint tenancy can be a trap, because the term itself has nice connotations.  It implies “the two of us,” a partnership, a marriage of title as well as love.  On the surface, at least, it appears to be the right way for people who care for each other to own property.  It’s psychologically pleasing, which for many people is the real advantage of owning their property jointly.

As in many other latent problems, joint tenancy is easy and convenient.  Odds are that when you were married (if you are), one of the first financial actions you and your spouse took was to open a checking or savings account.  The clerk who helped set up your account put it in your joint names when you answered yes to, “Both names on the account?” The same is true of your first house or your first car.  It seems that all of those involved (primarily clerks and salespeople), whether or not they knew what they were doing, took control of your planning and titled your property in joint tenancy.

For most people, the disadvantages of joint tenancy far exceed any advantages. Some of the more devastating pitfalls of joint tenancy are:

  1. There is no control, and property may pass to unintended heirs.
  2. There are no planning opportunities.
  3. For married couples, probate is at best delayed, not totally avoided.
  4. For non-spousal owners, unintentional gift taxes and death taxes can be generated.

We’ll explore each of these problems in more detail. Our goal is that you, as a professional advisor, will have clear and compelling answers for your clients as to why they should avoid titling assets in joint tenancy.  We also will suggest other ways they might own their property that will enable them to maintain the control they desire.

There Is No Control and Property May Pass to Unintended Heirs

Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do.  If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you.

Joint tenancy provides no means of ensuring that your property will pass to whom you want.  For example, if your spouse remarries, your children may inadvertently be disinherited.  Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death.  If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your property.

While joint tenants are living, they can sell their interest in the joint property and they can give their interest away.  In this respect, joint tenancy is similar to other forms of ownership.  It is only on the death of a joint tenant that its unique features come into play.  In North Carolina, joint tenancy between a husband and wife is called tenancy by the entirety.  It works exactly like joint tenancy with right of survivorship, except that it is more restrictive.  While both spouses are alive, the approval of both is necessary before the property can be transferred.

A joint tenant has the authority to take all the money from a bank account and has significant control over other types of property.  This “control” can be dangerous, especially since a deceased tenant would have had no opportunity to leave any instructions restricting the use of the joint tenancy property.  Even though the property is titled in joint tenancy, the joint tenant who dies is presumed to own 100 percent of the property.  As a result, the deceased tenant’s family not only loses the property (which passes to the surviving joint tenant) but also must pay all of the death taxes.  Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn’t even own.

Joint Ownership Provides No Planning Options

What if your spouse or children need assistance in managing the property you left them?  Joint tenancy cannot help.  What if you want to leave instructions for your loved ones as to how, when, and why your property is to be used?  Joint tenancy offers no opportunity for instructions of any kind.

If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own or your loved ones’ care.  If your spouse is disabled when you die, the probate court will “inherit” the joint tenancy property and determine how and when it is to be used for your spouse’s benefit.  More pitfalls and possible solutions next time in the final installment of this series.

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.

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 above $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.

Get Help Planning Your Estate and Protecting Your Property

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. If you would like help planning your estate and protecting your assets, call Carolina Family Estate Planning at (919) 443-3035 to learn how to get started.

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning