Understanding Joint Tenancy – Joint tenancy with right of survivorship, and more recently community property with right of survivorship, is often used by people who are not fully aware of the ramifications involved.  Let’s discuss.

Generally speaking, title to important assets — including one’s residence — is not taken in joint tenancy with anyone other than one’s own spouse or registered domestic partner.  If problems arise between the joint tenants, or arise due to the creditors of either joint tenant, the asset can be partitioned and sold.

When people hold title as joint tenants, or when spouses hold title as community property with right of survivorship, each co-owner has an equal and undivided co-ownership interest in the property.  Because joint tenants have equal, undivided ownership interests, any joint tenant can use the property as he or she pleases without accountability.

The property is answerable for each co-owner’s debts and tax liabilities.  When a joint tenant dies the property is answerable for the surviving joint owner(s) debts and only those debts of the deceased joint tenant to the extent of any lien in place prior to the deceased joint tenant’s death.  Also, if the deceased joint tenant received Medi-Cal benefits, an estate recovery claim can be made against the deceased joint tenant’s share of the joint tenancy.

A gift occurs when someone is added as a joint tenant.  The gift has both ownership and tax consequences.  If the gift is to someone other than one’s spouse and the gift exceeds $14,000 (the present annual gift tax exclusion) in value then a gift tax return is required.  It is most unlikely, however, that a gift tax will be payable now the lifetime gift tax exclusion is exceeds $5.25 million.

Moreover, it is often more advantageous income tax wise to inherit an interest in an asset at the owner’s death rather than to receive partial ownership as a lifetime gift through joint tenancy.  A surviving joint tenant only receives a partial-adjustment in tax basis when the deceased joint tenant dies (for the portion that he or she inherits at death) and receives a transfer basis for the part that he or she had previously received as a lifetime gift.  Thus, with appreciated assets, a joint tenancy means that  capital gains tax will be payable by the surviving joint tenant(s) when the asset is sold.

With the notable exception of bank accounts, all co-owners to joint tenancy assets must cooperate to manage or to sell the property.  That is difficult when a joint tenant is incapacitated.  Unless the incapacitated joint tenancy owner has an adequate power of attorney, a conservatorship of the incapacitated joint tenant’s estate may be necessary to sell or manage the asset.

Bank accounts that are titled as joint tenancy accounts, however, can be managed by any one joint tenant acting alone.  Thus, some parents title their day to day bank accounts as joint tenancy account to include a trusted child on title.

The hallmark feature of a joint tenancy is its “right of survival” feature:  The surviving joint tenant(s) automatically inherits all (100%) of the deceased joint tenant’s ownership interest at his or death without probate and without regard to the terms of the deceased joint tenant’s will.  This means that transfer of a joint tenancy asset at death is both quick and cheap.

An important exception to the right of survivorship applies when the surviving joint tenant is the decedent’s ex-spouse or ex-registered domestic partner, unless a court order or written agreement says otherwise.   Instead, the deceased joint tenant’s interest passes under his or her will or otherwise to his or her heirs.

Due to the risks and limitations of joint tenancy, revocable living trusts are typically used to own the major assets in a person’s estate.  Trusts not only avoid probate but also offer more comprehensive estate planning solutions.

“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”