Joint Tenancy

Joint Tenancy: Pros and Cons

by Edgar Saenz, Esq.

February 26, 2013

The main difference between joint tenancy and tenancy in common is that joint tenancy creates an automatic right of survivorship.   This means that when a joint tenant dies, the other joint tenant or tenants inherit the deceased’s share in the property.  It’s a popular way to hold title.  Married couples and family members often hold title to real property in joint tenancy.   Joint tenancy (“JT”) has certain advantages and drawbacks.

Advantages

JT is easy and inexpensive to create.  The JT is created by recording a deed with the county recorder stating that the property is held in JT.  An attorney will typically draw one up for a few hundred dollars.  The recording fee is usually around $25.

JT avoids probate.  By law, property that passes through JT is not a probatable asset of the deceased’s estate.   After death, an affidavit of death of joint tenant should be recorded on the property.

Disadvantages

JT property does not pass through a will.  Say Bob owns an apartment building with his brother Bill in JT.    Bob’s will provides that all of his property passes to his grandchildren in equal shares.  However, when Bob dies, his half of the apartment building passes to Bill, not to his grandchildren.

The JT relationship is easily and unilaterally broken.  Any joint tenant can sever the JT by transferring his interest to himself as a tenant in common.  In the example above, if Bill records a quitclaim deed transferring his interests from himself as a joint tenant to himself as tenant in common, there is no longer any automatic right of survivorship between Bob and Bill.

JT is in equal shares only.  Thus, if Bob and Bill contributed unequal amounts to the apartments and want title to reflect, say, a 70-30 split, they cannot use JT.

Only the deceased JT’s share receives a step-up in basis.   (Basis is the value used to compute a capital tax gain or loss.)  Generally, the surviving joint tenant, to the extent the asset is included in the estate of the deceased joint tenant, will receive a new basis as of the date of death. The portion of the asset which is not included in the decedent’s estate will retain the survivor’s adjusted basis.

I often see parents use JT as a testamentary device instead of establishing a will or a trust.  Say Mother wants her son Jimmy on title to the home, so that he will own it when she dies.  What Mother must keep in mind is that she gives up half ownership of the property.  Jimmy, the new co-owner, could sell or mortgage his share—or lose it to creditors or in a divorce.  He could do this while Mother is alive.

If fair market value is not paid for the property, a taxable gift is deemed to have been made when a joint tenant is added.  If the value of the property interest transferred exceeds $14,000, a federal gift tax return is due on April 15 of the year following the transfer.

For federal estate tax purposes, the original owner is treated as if she had not given away a part interest in the property.  The entire joint tenancy property remains in the donor’s taxable estate—the property which, at death, is subject to federal estate tax.

Using JT as a will substitute may spawn family disputes after death.  Many older people make the mistake of adding someone as a joint tenant just for “convenience.”  In the example above, suppose Mother had three children.  After Mother dies, the co-owner may claim that he is entitled, as a surviving joint tenant, to the entire property.  In some instances, that may not be what Mother really intended—but it’s too late to fix it.

Summary

Joint tenancy is a simple way to hold title to real property in which the survivor inherits the deceased owner’s share.  However, JT has certain disadvantages related to basis, control, and flexibility.

Joint Tenancy At A Glance

Avoids probate? Yes
Passable through will? No
Types of assets? Real estate, vehicles, bank accounts, brokerage accounts, etc.
Passes automatically to surviving owner? Yes
Can joint tenant leave his share to anyone other than the surviving joint tenants? No

 

Disadvantages of Joint Tenancy

A joint tenant can easily and unilaterally break the joint tenancy at any time before death.
Probate is not avoided when the last owner dies.
Probate is not avoided if both owners die simultaneously.
All joint tenants must own equal shares of property.  (E.g., no 60-40)
Only the deceased joint tenant’s share receives a stepped-up basis at his death.

 

Edgar Saenz is a Los Angeles estate planning attorney.  A graduate of Stanford Law School, he is a member of the Trust and Estates sections of the State Bar of California and the Los Angeles County and Santa Monica bar associations.  Edgar serves on the board of the Culver Marina Bar Association. He is rated AV (Preeminent, Highest Possible Rating) by Martindale Hubbell. Telephone:  (310) 417-9900; Edgar@EdgarSaenz.com.