Last week I mentioned joint tenancy bank accounts as being a simple, but potentially dangerous way to provide for a transition of bank accounts. It is a commonly used technique because it is simple and is the favored way for bankers and investment advisors to administrative your accounts with the least amount of effort for them.
It is another example of my “broken clock” philosophy. It is right twice a day. When it works it is very simple and economical, but when it fails, it falls with a loud “thud” and can be very expensive, especially when you are aware of the other almost as simple and cost effective methods you could use.
About 12 years ago, I wrote a brief explanation of these problems from the perspective of the wealth transfer system. Those 6 reasons remain valuable today, but I have rearranged the order of importance to take into consideration the different considerations which I believe almost everyone will face based on today’s different challenges.
In summary, using joint tenancy, may expose your assets to the liabilities of your joint tenant, accounts may be at risk because the joint tenant has control over the account without a corresponding fiduciary duty, you may unwittingly incur the costs of an unwanted probate proceeding, you may suffer an adverse income tax result, you may suffer an adverse estate tax result, your property may not pass to your descendants as you intended, and you may have created an avoidable risk from accidental creditors.
Here are the 6 tragic adverse, but avoidable, consequences you and your family may suffer if you rely on joint tenancy:
1. Joint tenancy accounts with adult child or caretaker subjects you to expensive and potentially devastating results and the loss of the asset. Joint tenancy property is fair game for creditors of your joint tenant. Although you may have an opportunity to prove the property was placed into joint tenancy for convenience and that the property really does not belong to the debtor, you are exposed to litigation and the expense and uncertainty that are litigation’s natural results. You are also susceptible to the joint tenant misusing the property or not sharing the property with his or her siblings as you intended.
2. Joint tenancy will avoid probate for the first spouse, but not the second. In fact it assures that there will be a public probate proceeding when the surviving spouse dies.
3. If the asset is real property or an investment account, joint tenancy will also cause the estate to lose the double step-up in basis afforded to community property assets. This is a significant loss resulting in additional capital gains taxes if the asset is sold by the surviving spouse
4. A joint tenant has no control over what happens to the property after death. A surviving joint tenant can sell or transfer the property, or can pass it to the survivor’s choice of heirs, including subsequent spouses. Joint tenancy deprives you from assuring that your property stays in your bloodline. Without any further planning, property owned by a surviving joint tenant will pass automatically to the heirs of the survivor. If the survivor’s heirs are not the same as the decedent’s this could lead to an unintended result
5. No creditor protection is available when property passes by joint tenancy. Creditors come in many shapes and sizes these days. Jury verdicts in even the most common accidents easily exceed insurance limits. Aging survivors are more susceptible to lapses of concentration while driving or otherwise. Why unnecessarily expose all of the survivor’s assets to creditors when a trust can provide creditor protection to your spouse or your descendants? This is valuable protection that can not be purchased at any price if you miss the planning opportunity of placing your accounts into a trust that will be irrevocable when the first spouse dies.
6. No estate tax protection for post-death appreciation is available if joint tenancy is used. Although the asset will pass to your spouse estate tax free; upon the death of the survivor, the entire estate is exposed to estate taxes and the estate tax exemption available to the first decedent is lost unless you have planned for a credit shelter trust or file an estate tax return and claim the “portability” carryover exemption. If your combined estate, including life insurance is likely to exceed $5,000,000 (or $1,000,000 if the law is not changed before the end of 2012), then you have unnecessarily benefitted the government at the expense of your descendants. This could be a mistake that could cost you 55% of the value of your estate in excess of $1,000,000.
I encourage you to take the time to consider whether joint tenancy is a viable strategy for you. You may be the broken clock that is right twice a day, by why take that risk relying on a do-it-yourself approach to a complicated issue. Call me to help you sort through what plan is best for you.