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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, November 15, 2009

Be Hesitant With Titling Joint Tenants

It is quite common for people to use joint tenancy (with right of survivorship) in their estate planning. This is especially true for seniors whose spouses have predeceased them. Consider the following example:

Instead of going to the trouble of creating a revocable living trust, Mom (Dad passed away a year ago) titles her house jointly with her son Frank, and re-titles her investment account to be jointly held with her daughter Mary. She re-titles her checking and savings accounts to be jointly held with her other daughter Jennifer. The house is worth $300,000, the investment account $150,000 and the checking and savings, about $35,000.

Mom is confident that the children will share her assets equally between them. Unfortunately, Frank’s wife dies and he then remarries. His new wife Elaine, doesn’t like either Mary of Jennifer. The children’s relationship becomes strained. When Mom dies, Elaine convinces Frank that he deserves the full value of the house. Mary and Jennifer split the remaining $185,000 but lose out on their share of the house.

Mom was sure her children would share her assets equally. After all, her will specified that everything be split equally among the three of her children. The above example illustrates just a couple of common problems with joint tenancy with right of survivorship (JTWROS).

First of all, many people commonly assume that their will controls the disposition of their assets. That’s true, in part, however, wills only control the disposition of assets titled in the name of the person who wrote the will. Property held jointly with right of survivorship passes immediately upon death to the joint owners, by what is called “operation of law”. IRAs, 401(k)s and insurance policies are disposed of according to beneficiary designations.

Therefore, Mom’s joint assets will only be shared equally if all joint owners want to. In our experience, issues between siblings that have existed for years often boil to the surface after Mom and Dad are gone. Sometimes it is the distribution of personal items that triggers the conflict. Depending on the good will of your children to make joint titling effective is a big mistake.

There are other problems with joint titling. In many cases, naming another individual who contributed nothing to the purchase of the property actually constitutes a gift. And, under current gift tax rules, if the share being gifted is more than $13,000, a gift tax return may need to be filed (married couples are exempt from these rules and other situations may be exempt). We suggest that anyone doing this should check with their tax advisor or attorney.

Another problem with joint titling is that the original owner may lose control of the property. Mom may want to later sell her house but if Frank wants to keep it a conflict may surface. Also, if Frank gets sued or files for divorce, his interest in the house could be in jeopardy. Tax liens or actions by creditors could also have an impact on joint property.

In conclusion, if your parent is considering re-titling assets jointly with you or your siblings, make sure they all are aware of the disadvantages of doing so and discuss the issue with your financial advisor, attorney or tax advisor first.


Anonymous Joint tenants said...

Joint Tenancy does not entirely eliminate the process of probate. Even though Joint Tenancy can avoid probate on the first spouse to die, the entire estate must go through Probate upon the death of the second spouse. Having the entire estate go through probate upon the death of the second spouse is one of the strongest arguments against Joint Tenancy. At best, Joint Tenancy simply delays the inevitable probate cost on the second to die.

January 25, 2010 at 3:44 AM 
Blogger David C. Patterson and Erin Preston said...

What "Joint tenants" said was true. When we have clients with estate tax problems we generally recommend they acquire irrevocable living trusts and title their assets in the name of the trusts. If estate taxes are not an issue, and there aren't other good reasons to have trusts established, we always recommend that the survivor consider a trust after the first spouse dies, to avoid the probate issue. Probate could still be a problem. however, in the unlikely case that the property is titled jointly and both spouses die in an accident.

January 25, 2010 at 11:51 AM 

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