Sunday, October 26, 2014

Probate Avoidance Series, Topic #3: Joint Ownership and Naming Death Beneficiaries

Picture by Kance
In my last two posts, I discussed the lengthy and much-disliked probate court process for distributing property after death.  The next post covered the popular and very flexible tool known as the living trust, which helps many American families distribute their property quickly while avoiding probate court.  Today I'll discuss a probate avoidance method that is so common, most American adults have probably used it, though they may not have realized they were making an estate planning decision.   In this post, read how this method, known as joint ownership, can sometimes be a good way to pass on property and avoid probate after your death:

If you have ever owned a car or house jointly with another person, then, in the eyes of the law, you entered a "joint tenancy with right of survivorship."  The same is true if you have ever formed a joint bank account with a parent, sibling, spouse, or anyone else.  It has become such a routine to title our vehicles, houses, and accounts with our family members, that we may not even think through the legal ramifications of doing so.  As a side note, in many states, joint ownership with a spouse creates something called a "tenancy by the entirety," which for our purposes is similar to joint tenancy with right of survivorship.

Joint tenancy with right of survivorship is different from a mere "tenancy in common," where two or more people maintain shares of a property, but their shares remain separate and can be freely given or sold away.  To visualize a tenancy in common, imagine owning a share of a vacation house in Orlando.  You sign an agreement with your friend Bill to be tenants in common.  Though you both own a share in the house,  the agreement says you have rights to visit the house from January until June, and Bill has rights to visit July until December.  As tenants in common, there are limits to your relationship with Bill.  If Bill gets sued, he could lose his share of the property, but your share cannot be touched.  Either of you could sell your share of the property at any time, without the permission of the other.  And in your will or living trust, you could give your share away freely.  Bill does not take over your share of the property if you die.

In contrast, to visualize joint ownership, imagine an elderly widow adding her daughter on the title of her house, as a joint tenant with right of survivorship.  The mother also places her daughter's name as a joint owner of her bank account.  By placing her daughter on the house title and bank account, the widow makes several very important legal decisions.  First, the mother and daughter as joint tenants have an undivided ownership share in the property.  Each one of them has an equal claim to use the property at any time.  Let's discuss some benefits and drawbacks of this joint ownership arrangement:

The biggest estate planning benefit from joint ownership is that if one person (let's say the mother) dies, her share in the ownership of the property disappears and her daughter automatically takes complete ownership of the property.  There is no need for a probate court proceeding; she is already an owner of the house and the financial account.  This benefit potentially saves the family a year or more of court proceedings.

However, there are drawbacks to joint ownership in this scenario.  First, the mother can no longer sell the house or close her accounts without the daughter also signing off on the decision (and vice versa).  Their futures are bound together, for better or for worse.  Second, both members of the joint tenancy have an absolute ownership share in the property.  One person might engage in very selfish behavior (like the daughter wasting money in the joint bank account or neglecting the upkeep of the house) and the other cannot prevent it.  Third, if one of the joint owners has problems with bill collectors, gets sued, or becomes divorced, the house and financial accounts could be taken and both could lose out.

A joint ownership arrangement is also irrevocable.  In the example above, if three years from now, the mother decides she no longer wishes to pass on property to her daughter after her death, she cannot take her daughter off the title or the account.  Contrast this to a will or living trust which can be updated any time before death.  Additionally, adding a joint owner to a property that has appreciated in value could be throwing away one of the biggest income tax benefits in the United States, the automatic step-up in basis at death.

One possible way to achieve some of the benefits of joint ownership without the drawbacks is to name death beneficiaries on your financial accounts.  If you die, the death beneficiaries become the new owners of your property without going through the probate process.  But during your life, they are not owners.  They will however be able to take advantage of benefits like the income tax step-up in basis.  And unlike naming them as joint owners, you can change the decision at any time in your life and you do not become liable for their problems during your life.  The process to set up death beneficiaries is easy:  It took me 10 minutes through my online banking portal.  If you go this route, make sure to notify your death beneficiaries of the accounts they are entitled to claim upon your death.

In conclusion, while joint tenancy is one of the most common probate avoidance strategies, it has a lot of drawbacks.  Speak with a qualified estate planning attorney if you intend to use joint ownership as an estate planning technique.

Next Topic in the Probate Avoidance series:  Lifetime Gifts

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  

Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 


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