Joint Tenancy is a form of ownership of property by two or more people. The joint tenants to a property have an equal and undivided interest in the property. The document evidencing title (passbook, stock certificate or deed) has the names of all of the joint tenants and often clearly states “joint tenancy” or “as joint tenants with right of survivorship.” Property owned in joint tenancy passes to the surviving joint tenant without probate. This is true even if the joint tenant who died first has a will or Trust. A property held in Joint tenancy passes to the surviving joint tenant regardless of what is said in the will or Trust. In effect, the property bypasses the will and probate altogether.
Disadvantages of Joint Tenancy
. Joint Tenancy avoids probate only temporarily
Even though upon the death of the first joint tenant property held in joint tenancy will pass to the survivor without probate, but once the survivor dies the property will still be subjected to probate.
Example: Husband and wife own property in joint tenancy. The husband dies. The wife then takes the property as sole owner without probate. When the wife dies, however, the property will then be subject to probate before it could pass to the children.
. Joint Tenancy May Have Adverse Tax consequence
Gift Taxes - When you place another person’s name on your property as a joint tenant, you are in effect gifting half of your property to that person. The value of one-half of the property placed in joint tenancy may be considered to be a gift made by the first owner to the new joint tenant, and therefore it may be subject to gift taxes.
Income Taxes – Holding an appreciated asset in joint tenancy may have severe income (capital gain) tax consequences. Upon the death of one of the joint tenants, only half of the joint tenancy property receives an adjusted new basis at fair market value. The basis for the surviving joint tenant’s half remains the same as when the property was first bought. Therefore, when the surviving joint tenant sells the property after the first joint tenant’s death a hefty capital gain tax may be due on the appreciated property.
Example: Jim and Jane, husband and wife, buy their Silicon Valley property in 1975 for $100,000. They take title as joint tenants. In January of 2000, Jim passes away. At Jim’s death the property is worth $1,000,000. Soon thereafter, Jane sells the property for $1,000,000. The capital gain on the sale of this property is $450,000, all or part of which may be subject to taxes. The capital gain is the difference between the adjusted basis of the property and its sales price.
The adjusted basis for the property is calculated by adding Jane’s basis for her one-half interest in the house to the basis for the one-half interest she received from Jim. Jane’s basis in her one-half share of the house is half of purchase price ($100,000) or $50,000. Her basis for the one-half that she received as a joint tenant from Jim is one-half of the fair market value of the house at Jim’s death or $500,000. Jane’s adjusted basis in the house is accordingly $550,000. Therefore, if Jane sells the house for $1,000,000, she realizes a capital gain of $450,000 ($1,000,000 less $550,000). If this property was Jane’s principal place of residence, she may be able to use her Federal exemption of $250,000. But she still has to pay capital gain taxes on a gain of $200,000.
On the other hand, if the husband and wife had taken title to their property as community property, the entire property would receive a new adjusted basis equal to the fair market value of the property at the date of the husband’s death.
Example: Under the facts of the previous example, if Jim and Jane held title in their home in community property, Jane could then sell the property at $1,000,000, with no capital gain taxes.
Estate Taxes – Joint tenancy precludes any opportunity for estate planning as to that property. The property will automatically go to the joint tenant. Thus, holding an asset in joint tenancy prevents use of Living Trusts or other estate planning to save estate taxes.
More importantly, even though a property is passed on by joint tenancy to another person, that property is still counted as part of the estate of the deceased person.
Example: Jim and Jane are married and have two kids. Jim owns an office building with his brother the title of which they hold in joint tenancy. At Jim’s death, Jim’s half interest in the office building goes directly to his brother, not to his wife or kids. Nevertheless, Jim’s half interest in the office building is included in his estate for determination of his estate taxes. Therefore, even though Jim’s wife and kids didn’t get any part of the office building, they may still end up paying estate taxes for it.
. Unwanted Legal Problems Created by Joint Tenancy
The creditors of your joint tenant may be entitled to satisfy a debt of your joint tenant by attaching the joint tenancy property, taking over the other joint tenant’s share, or even selling the property to satisfy the debt.
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