The co-owners of the property, called joint tenants have equal right to use, possess or dispose of the land. Joint tenants similarly share equal ownership of the property.
Property held in joint tenancy generally transfers to the surviving joint tenant regardless of any will or trust. A common misunderstanding is that by having property in joint tenancy, Probate and its expenses will be avoided. It is essential to know that joint tenancy will not avoid Probate: It will only postpone it. Upon the death of the first joint tenant, the property will automatically pass to the surviving joint tenant. However, upon the death of the surviving joint tenant, Probate will be commenced unless the surviving joint tenant creates a new joint tenancy or a living trust.
Another issue with joint tenancy, is people’s misunderstanding of the fact that the property automatically transfers upon the death of the first joint tenant, regardless of any intentions echoed otherwise in any trust or will instrument. An easy way to unintentionally disinherit a loved one is to bequest a percentage of property which is held in joint tenancy, via will or trust. Sometimes people go to the effort of putting a trust in place, however keep their home in joint tenancy. The result is that regardless of what disposition is provided for in the trust relating to the property, the property will transfer outside of the will or trust. Nobody has the legal right to bequeath such property via any will or trust instrument. As a result many heirs who are unintentionally disinherited in this manner, oftentimes contest the will and/or trust, resulting in expensive and unnecessary litigation.
Another problem with joint tenancy is that the surviving joint tenant will not receive the full step-up in cost basis they would receive if they inherited the property. Consider the following example:
In 2001 Mary buys a house valued at $300,000.00 In 2002, Mary decides to name her daughter Martha, who was living in the home, as joint tenant on the house, to ensure that she received the house without issue on her death. Today the fair market value of the house is $1,000,000.00. Mary passes. Martha automatically receives Mary’s share in the property. Upon Mary’s death, the law treats as Martha as inheriting Mary’s interest, and as to Mary’s interest, Martha receives a “stepped up” basis in Mary’s one half of the property. Assuming the property was worth $1,000,000.00 on the date of death, Mary’s one half of the property gets a new basis equivalent to one half of the date of death value. i.e. $500,000.00. Martha’s basis in her one half interest in the property remains at one half of the original cost, i,e, $150,000.00. If Martha sells the property, she will incur a taxable gain of $350,000.00, upon which she will owe capital gains tax. Had Mary chosen to keep full title of the property and leave the home to her daughter via a trust instrument, Martha would have received a full costs step up basis, meaning that she would not owe any capital gains tax upon selling the home.
Aside from capital gains taxes, there are also significant gift tax consequences to adding a non spouse as joint tenant on your property, which will be addressed in later articles.
It is important to understand the property ownership type that is joint tenancy. Many people, with the best intentions of providing for their loved ones after their passing, oftentimes overlook the drawbacks with joint tenancy and oftentimes as a result, their true wishes for their family cannot be realized.