One of the goals of estate planning is to avoid the costly and time-consuming Probate Court process. That is, the legal process undertaken by your heirs and beneficiaries to change the title of property held solely in your name into the name of another. Frequently you will hear laypeople (and some lawyers) opine on the use of Joint Tenancy as a method to do this. And, in the absence of other estate planning tools, this can be effective. It also has its drawbacks.
What is Joint Tenancy?
Joint tenancy, or also more formally referred to as joint tenancy with a right of survivorship, provides joint ownership of the property for those named as the joint tenants. The right of survivorship means that upon the passing of the one of the joint tenants, the remaining owners would equally split his/her share. So, as you can imagine, a husband and wife own a property as joint tenants. When one passes, the surviving spouse files an affidavit of death with the register of deeds office, along with a copy of the death certificate, and the property is retitled solely in the surviving spouse’s name. Probate court avoided.
But what happens if both joint tenants pass at the same time?
This is relatively uncommon. But what is more common, is that the surviving spouse passes before he or she has the opportunity to retitle the property in the name of another joint tenant. For those wishing to avoid this problem, they include one or more children as joint tenants as well. That would seem to solve the problem, in theory, but it has some drawbacks.
The drawbacks of multiple joint tenants.
First, the more joint tenants own the property, the more you give up control of your property. Should you choose to sell the property during your lifetime, you would need to get everyone’s approval to sell all the property interests to someone else.
Second, you need to consider the possibility that one of your joint tenants will have financial problems, and creditors will attempt to attach the property to satisfy a debt.
Third, if one of the joint tenants decides to sell his or her share of the property to another, it will destroy the joint tenancy. And now you are back where you started — in Probate Court.
Use of the “Step-Up” basis.
Even if none of these events occur, there is another reason why many people avoid the joint tenancy pitfalls in estate planning: the “step-up” basis for tax purposes. If an asset, such as most real property, is expected to increase in value, the surviving joint tenant will not receive a “step-up” in cost basis to the fair market value at the time of death of the other joint tenant. Use of the joint tenancy as an estate planning tool then fails to take advantage of the capital gain tax advantages that are offered by using other estate planning tools.
By placing the property in a revocable trust the couple retains control of the property and can take advantage of the “step-up” basis provided under the law.
What to discuss what estate planning tools may be best for you? Contact CASHMAN LAW today for a free consultation to see how we might assist.
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