Joint tenancy is considered by many people as a valid reason for not having a Will or a Trust. The reason being is if everything is held jointly with full right of survivorship it will avoid probate and there is no need for a Will, a Trust or any Estate Planning.
Well, yes, no, maybe, not exactly.
Joint ownership with full right of survivorship (JTWROS) does, in fact, avoid probate. However, there are a number of issues with this estate planning technique and today we will highlight some of the biggest reasons why it often becomes a trap rather than a smart strategy.
First of all, JTWROS often contradicts what a person's true intentions were and, in many cases, leads to a fragmented estate plan. There is no way to make provisions for lineal descendants (blood relatives, grand children). If an adult child joint owner dies before your die, their share is split among the remaining joint owners, assuming there are others. It is common for people to make provisions in their Will or Trust for their grand children if their adult children predecease them.
Furthermore, many who use this technique often choose one adult child as their joint owner with the instructions to split everything with the other siblings. The problem: They don't have to and there's nothing anyone can do to force them. In over a decade of working with attorneys, we often warn our clients that people change when people die. Naming one child to disperse assets to siblings not only creates potential tax issues, it removes any control you could have had over who gets what in a Will or Trust.
Also, everyone has to die in the right order. Many wait until the first spouse dies to add the joint ownership, but if the joint owners die at the same time, such as a car crash, the estate of the joint owner determined to have died last would be probated. If neither had a valid Will or Trust the state of Florida probates the assets according to state law, not according to the desires of the deceased.
Many senior married couple's adult children get caught in the "Probate Court System" because Mom or Dad failed to realize when their spouse died they no longer owned their assets as Joint Owners. Now they own the asset as an Individual Sole Owner, and that form of ownership always triggers Probate Court at death.
Joint ownership with adult children is potentially the most costly and at risk, dangerous way to title any of your assets! To illustrate a clearer picture let's review just a few examples of the many traps that become set by using joint ownership as an estate planning technique.
Example 1: The Tax Trap
Molly, now a widow, recognizes the need to create an estate plan to avoid her assets going through the probate court system and decides to put her only child, Jack, on all of her assets as joint tenants with full right of survivorship. She puts his name on the deed of her house and ten years later Molly passes away.
Yes, Jack avoided probating mom's estate, but at the "cost" of losing the incredible step-up in basis provided in the Internal Revenue Service code.
Meaning, at the time Molly added her son Jack to the deed, the value of the home was $200,000. But ten years later at the time of Molly's death, the home was valued at $400,000. Who's now responsible for the capital gains tax on the house? You guessed it. Jack! Jack lost the full step-up in basis that a Will or Trust would have provided.
Jack's basis in the home would be imputed at $200,000. Yes, he would get the "step-up" on half of the equity growth, namely the $100,000 of Molly's half of the equity. However, Jack would have to claim the other $100,000 half of the equity growth as a capital gain at the time of sale. At a 15% capital gains tax rate (2017), Jack now pays $15,000 in additional federal taxes! This technique also creates potential gift tax issues.
A very costly mistake and certainly not less expensive than even the most expensive Will or Trust.
Example 2: The Legal Judgment Trap
Tom and Grace retired and sold their home up North and moved to Florida. They have a decent income and are renting a condo on Clearwater Beach, Florida, living off social security, a pension and the interest earnings from the $400,000 sale of their home they put in a CD and a money market account at their bank. To avoid their estate from probate they put their three adult children as joint tenants with full right of survivorship on these accounts.
Several years go by, Tom and Grace are having an amazing retirement and then the worst news possible arrives. While they were well intentioned in that joint ownership would avoid their bank accounts from going through probate court, they didn't realize they exposed themselves to all of their adult children's current and future legal problems.
Tom and Grace's son, Michael, is going through a bitter divorce. Because Michael is a joint owner of his parent's accounts, that money is part of the marital assets with his soon to be ex-wife. The divorce judge orders fifty percent equitable distribution of all of their assets which include Michael's share of Tom and Grace's bank accounts. In this example, Michael's wife is entitled to $40,000 of Tom and Grace's $400,000 bank accounts.
Another very costly mistake and again not less expensive than setting up a proper estate plan.
This scenario not only applies for divorce, but also for bankruptcy, a judgment from an at fault automobile accident, a lender recouping from a mortgage foreclosure or any other kind of judgment or lien against the adult children joint owners.
Example 3: The Unable or Unwilling Trap
Paul and Rose have been retired for some time now and after attending a workshop they learn about the issues with probate court. But rather than follow the advice of professionals, they decided to put their two adult children's names on their assets, including their home.
After several years in retirement they realize they can no longer afford their home and need to downsize to avoid going back to work. Unfortunately a year prior, their daughter, Judy, was in a terrible car accident and was left incapacitated.
As Paul and Rose proceeded to sell their home they learned from the title agent that Judy also needs to sign the deed for the sale of the home. The problem: Judy is incapacitated. She can't sign. Only her guardian appointed by the court from her Guardianship Proceeding can sign on her behalf. Now the sale of the home is delayed and Judy's guardian has a fiduciary responsibility to look out for her best interest and simply giving away her share of the proceeds from the sale of the home would not be in her best interest. The guardian and overseeing government body would likely require her share to be paid to Judy to continue to pay for the cost of her care.
This scenario could also have other adverse effects. For example, it could delay or reduce government disability assistance for Judy because she now has an asset.
While Paul and Rose were simply trying to avoid a legal can of worms in probate court, they unwittingly opened a drum of legal rattlesnakes. What if you have a falling out with your adult child joint owner? Perhaps they don't agree with the financial decisions you are making or are simply being spiteful. Your only recourse to getting them to sign off ownership of an asset like a house is by suing them and hoping a judge sees it your way.
Ultimately, you lose full control of your assets when you add joint owners, and no one has a crystal ball to see what issues might arise in the future. The cost of the above joint ownership "Estate Planning Techniques" range from $15,000 to $40,000 dollars. These examples well exceed what anyone would have to pay for the most sophisticated Estate Plans. Typical fees to set up an uncomplicated Trust range from about $700 to $1,000.
The bottom line, be smart and do your estate planning right. Don't set traps for yourself and beneficiaries.
Schedule a free consultation to begin the process of creating your unique estate plan.
James Spicuzza may be reached at 727.939.9465 or by e-mail.
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Disclaimer: The Trust Group Financial Services does not practice law. The Trust Group has relationships with properly licensed Florida attorneys. Any legal documents to be prepared or modified is done solely by attorneys properly licensed in the State of Florida.