Problems with a Joint Tenancy

piggybankWhile the method is often used, holding property in joint tenancy is not always the best estate planning tool.  It  often has unexpected results.

What is joint tenancy?  Under California law, a joint tenancy is property held in undivided equal shares by two or more persons.  The primary feature of a joint tenancy is a right of survivorship – the surviving joint tenant(s) obtain title to the property as a matter of law.

This is why a transfer of a joint tenant account avoids probate, and why it is often used as an estate planning tool.  For example, if a parent wants to transfer a bank account to a child, he or she could make the account a joint tenancy account.  The parent has use of the account during his or her life, but at death the child has ownership.  In general, joint tenancy transfer prevails over the will, and it is generally used as a “non-probate transfer.”  Even if a will lists a joint tenancy account as an asset, disposition of the account is generally not governed by the will.

Yet, pitfalls abound.  I have had clients with property in a joint tenancy, where an unexpected death results in a completely unexpected transfer.  Moreover — especially with real property — there may be gift tax consequences of placing property in joint tenancy with another.  If the son or daughter joint tenant (in my example, above) is in an automobile accident and insurance does not cover the loss, the parent’s account may be subject to debt collection – as another example.

And, of course, the joint tenant can always withdraw the funds!

Holding property in a trust is much more flexible, with a reduced possibility of unexpected consequences, and the parent (or other giver) may maintain control over the funds.  Also, it is difficult to have a coordinated estate plan with joint tenancy accounts.

This entry was posted in Current Topics. Bookmark the permalink.