When fewer than half of all adult Americans have estate plans, you must ask yourself: why? One answer is that many people think they have already taken care of how their assets will pass to their heirs through joint tenancy. Joint tenancy works well if nothing out of the ordinary exists or occurs; but there are many problems that may arise. Here are just 7 of the worst things that might happen if you use joint tenancy to pass your assets on to your heirs:
- 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. All of the survivor’s assets are exposed to creditors when assets are in joint tenancy. A trust based plan can provide creditor protection to your spouse or your descendants. This valuable protection can not be purchased at any price if you miss this planning opportunity.
- Defeats an Estate Plan. Property in joint tenancy passes to the joint tenant even if your Will indicates a different result. Heirs other than the joint tenant get nothing. If the joint tenant tries to distribute property to other heirs there will be a gift tax consequence.
- 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 tax exemption normally available to the first decedent will be lost. If your estate (including life insurance) is likely to exceed the Applicable Exclusion Amount (scheduled to return to only $1,000,000 in 2011) then you have unnecessarily benefitted the government at the expense of your descendants. However, if a “credit shelter” trust plan is utilized, the decedent’s estate, will escape taxation no matter how much it appreciates before the death of the surviving spouse.
- Reduced protection from accumulated capital gains. Individually owned or community property receives a “step up” basis to fair value at the date of death and your heirs can sell the property and pay no capital gains. If property is held as joint tenants, the joint tenant avoids probate, but receives the favorable “step up” basis treatment on only one-half of the property.
- Lack of control. 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 of the assurance 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 heirs, an undesirable result may occur.
- Guarantees public probate proceedings. Although there will be no probate administration when the first joint tenant dies, then (unless the survivor creates a new plan) a public probate proceeding will be necessary to complete the transfer of the property upon the death of the survivor.
- May subject you to expensive and potentially devastating results. Joint tenancy property is fair game for your joint tenant’s creditors. Although you may have an opportunity to prove your property was placed into joint tenancy for convenience and that the property really does not belong to the debtor, you are exposed to the expense and uncertainty of litigation.