Joint Tenancy Troubles

     Joint Tenancy is a common form of asset ownership.* If you own a bank account, brokerage account or perhaps real estate with one or more persons, then you and they may be Joint Tenants. The full legal expression for this form of ownership is Joint Tenants with Rights of Survivorship (JTWROS).

Right of Survivorship

     When one or more persons hold title to an asset as JTWROS, each of them owns the asset. When one Joint Tenant dies, the remaining Joint Tenants continue to own the asset. Ultimately, the sole surviving Joint Tenant owns the entire asset. This Right of Survivorship is one of the attractive legal features of JTWROS.
     Not surprisingly, many JTWROS relationships are between family members. It just seems like the natural thing to do and, especially between spouses in a long-term marriage, it reflects the financial partnership of their commitment. Nevertheless, as with most things in life there are advantages and disadvantages to this form of asset ownership.

Advantages

     When married couples acquire an asset together, the creation of JTWROS ownership between them is so common it should be called Joint Tendency.
     If a Joint Tenant becomes incapacitated, probate may be avoided regarding any JTWROS assets. For example, the healthy spouse may continue to draw on the JTWROS bank account without interference because of their concurrent ownership rights. For this reason many widows, widowers and other singles may add trusted family members or friends as Joint Tenants to their assets.
     Upon the death of a Joint Tenant, probate will be avoided as long as there is at least one surviving Joint Tenant. This may result in substantial savings in terms of professional fees, court costs (and delays) and maintaining privacy. For these reasons some people add multiple family members, or even friends, as JTWROS on their assets to ensure the likelihood of having at least one trustworthy survivor upon their death.

Disadvantages

     Sometimes apparent legal simplicity may lead to unintended legal complexity. So it is with JTWROS. Before you decide to create or continue JTWROS ownership, consider the following potential pitfalls.
     JTWROS may avoid probate upon incapacity and even at death … but only if there is at least one living Joint Tenant who also is not incapacitated. To ensure this, however, most people add non-spouses as Joint Tenants. Whether it is children, siblings or friends, this can turn JTWROS into legal dynamite.
     Once you add someone as a Joint Tenant to a given asset, they also own the given asset just as you do. What you may have intended merely as a convenience has instead subjected the control, use and enjoyment of such asset to the potential liabilities of each Joint Tenant. These liabilities may come in many forms through your Joint Tenant, to include divorces, lawsuits, and creditors.
     Your plans for the eventual distribution of your assets may be lost through JTWROS ownership. For example, Wills, Revocable Living Trusts and even Premarital Agreements do not control assets held in JTWROS. Quite often assets passing to a surviving spouse later end up in JTWROS with a new spouse. That new spouse (and their children) ultimately may receive assets from the previous marriage instead of the children for whom they were originally intended.
     No discussion of JTWROS would be complete without mentioning its potential tax consequences. Depending on the total value of their estate, a married couple may forfeit in excess of $800,000 in unnecessary federal estate tax savings by excessive JTWROS ownership. Certainly no one wants to make the IRS a major beneficiary of their life's work.

     * Note: While Joint Tenancy is most often found between married couples in common law states, residents of community property states also should understand it, especially given the mobile nature of our society.

JTWROS Alternatives

     People seeking to avoid probate commonly choose to own their assets in Joint Tenancy with Rights of Survivorship (also known as joint tenancy). Unfortunately, this can result in unintended losses due to the financial problems of one or more of the joint owners.
     There are other strategies for probate avoidance that don't carry those risks and that can also be used to achieve estate distribution and federal estate tax minimization goals.

Incapacity Probate

     Every adult American is responsible for making their own personal, health care and financial decisions. When a person is unable to make those decisions due to incapacity, whether caused by a traumatic accident, illness, or advancing age, someone else must be appointed as guardian to do so for them. Absent other plans, guardians are appointed by the Probate Court. The process can be unpleasant for your loved ones, unnecessarily expensive, and the court proceeding opens your personal and financial circumstances to the public record.
     The fundamental legal instrument for avoiding probate at incapacity is a Durable Power of Attorney. Through a Durable Power of Attorney, you may appoint your own decision-makers and can provide them with limited or broad powers. Note that the legal authority of a Durable Power of Attorney stops upon your death. Other methods are necessary to avoid probate at death.

Death Probate and Estate Distribution

     Some state legislatures have authorized non-probate distribution methods for virtually every type of asset. Perhaps you have heard of such arrangements as Pay on Death bank accounts, Transfer on Death automobile titles, or even Beneficiary Deeds. These certainly are preferable distribution methods when compared to joint tenancy. Still, there are drawbacks. First, to achieve the probate avoidance goal, all named beneficiaries must be legal adults, have legal capacity, and must survive you. And, none of these methods help minimize federal estate taxes.

Revocable Living Trusts

     Much has been written about Revocable Living Trusts over the past few decades. For some people Revocable Living Trust (RLT) planning is too much, for some it is too little and for some it is just right.
     Basically, an RLT is a legal arrangement between three parties … and you are all three of the parties. You are the maker of your RLT, serve as its initial manager, and enjoy the assets it controls as its initial beneficiary. As a result, whether you are healthy, incapacitated and even after your death, you can control who manages your assets held in the RLT and who benefits from them.
     An RLT is one of the best all-around legal instruments available for probate avoidance, estate distribution and federal estate tax minimization (for married couples). However, to work properly all of the legal i's must be dotted and all of the legal t's must be crossed.