Many Americans rely on joint tenancy when building an estate and establishing investments, but there are plenty of reasons why those people should consider a more specific solution.
What is joint tenancy?
Joint tenancy occurs when multiple parties, usually a married couple, own a single piece of property or equal shares of an estate. If one party passes, the remaining party or parties absorb the relinquished share through what is known as a right of survivorship created at the outset.
Why do some people prefer joint tenancy?
Many reasons, most of which have to do with avoiding difficult situations. First, compared to creating a will, joint tenancy is a virtually cost-free estate planning solution that can be applied to any asset, be it a vacation home, stocks or a yacht. Joint tenancy also allows surviving estate or property holders to avoid probate, which again may eschew costs depending on the value of the asset in question and the probate thresholds set by state governments under which the related parties are subject. Finally, joint tenancy prevents couples and business partners from discussing each other’s deaths.
Drawing up estate planning paperwork, however, is always a far better idea, one that benefits all joint tenants involved. Here’s why:
1. Under joint tenancy, parties who pass first abdicate valuable rights
As a joint shareholder of an estate or property, you have the right to guide dispersal upon your death – that is, if you retain those rights with a will. Joint tenancy alone cannot steer your share toward a beneficiary of your choosing. Basically, the other tenant or tenants assume it flat out.
2. Joint tenants do not avoid probate court forever
The last surviving tenant of the estate or property will still have go through probate. If all parties die simultaneously, the estate or property will still have to go through probate. Relying on joint tenancy as a long-term estate planning solution, therefore, only delays the inevitable.
Furthermore, joint tenancy allows the surviving party to disburse the sum of an asset once shared by others, a duty which, theoretically, may fall on the least prepared or financially knowledgeable of the group, resulting in a less-than-ideal transfer of wealth.
3. Joint tenants must always be equals
In most states, entering into joint tenancy means each party holds an even share of their asset. If one shareholder dies and only one remains, the entire estate or property moves to the survivor. If one shareholder dies and more than one remains, the survivors split the forfeited share into even portions. Ownership, however, is not always equal, and in certain instances it may be worthwhile to establish commensurate percentages. Joint tenancy cannot provide that granularity. If a party or parties seek this detail, it must be done through the creation of an official will.
4. Joint tenancy trumps wills
If a piece of property or an estate is held in joint tenancy, those rights supersede anything established under any tenant’s will unless all tenants involved agree to dissolve their shared ownership rights. In this sense, it’s best not to enter joint tenancy at all because it can complicate matters at a very sensitive time.
5. The IRS can tax joint tenancy
Let’s say you establish joint tenancy with someone other than your spouse and assume the asset in question is very valuable. If the value of the equal share bestowed on the second tenant exceeds the threshold for federal gift tax exclusions, the first tenant will have to file a tax return and will be subject to payment later.
For these reasons and more, joint tenancy is more trouble than it’s worth. High net worth individuals, and everyone else for that matter, should instead go through the proper estate planning channels. The investment will more than pay for itself by capitalizing on the inalienable rights of the owner or owners. For more information on estate planning best practices and Leveraged Planning® solutions, contact a representative today.