Joint Tenancy Troubles

     Joint tenancy is one of the most common forms of asset ownership. [Although its primary application between married couples is found in common law states, residents of community property states also should understand JTWROS given the mobile nature of our society.] 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 ownership is Joint Tenants with Rights of Survivorship (JTWROS).

Rights of Survivorship

     When one or more persons hold title to an asset as Joint Tenants, 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

     More often than not, when married couples acquire an asset together the title is designated as JTWROS. In fact, the creation of JTWROS ownership between spouses is so common it could just as easily 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 convenience, many widows, widowers and other singles add 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. In an effort to avoid probate, some people add multiple family members, or even friends, as JTWROS on their assets. By doing so they hope 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 is not also incapacitated. In order to ensure this, however, most people add non-spouses as Joint Tenants. 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. In other words, the control, use and enjoyment of your asset is now expanded to the potential liabilities of each Joint Tenant. These liabilities may come in many forms through your Joint Tenant, to include divorces, lawsuits, creditors, and even outright theft (unfortunately, it is more common than you might imagine that formerly "trusted" persons abscond with assets to which they are legally, if not morally, entitled).
     It also is possible for JTWROS ownership to undermine your plans for the eventual distribution of your assets. In the estate planning "card deck," JTWROS ownership trumps Wills, Revocable Living Trusts and even Premarital Agreements. Assets held in JTWROS are not controlled by the terms of such legal documents. 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. Similar disinheritance problems result in every blended family situation following divorce and remarriage.
     No discussion of JTWROS would be complete without mentioning potentially adverse tax consequences. Depending on the total value of their estate, a married couple may forfeit in excess of $400,000 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.

Summary

     The scope of the advantages and disadvantages of JTWROS extend well beyond this brief overview. As with any estate planning technique, legal counsel should be sought for appropriateness in any given situation and consideration in light of applicable state law.

Joint Tenancy Alternatives

     While Joint Tenancy with Rights of Survivorship (JTWROS) is a common form of asset ownership, it can create unintended and unfavorable consequences. Goals such as probate avoidance upon incapacity or death can be avoided with alternative planning methods that do not expose your assets to loss due to the problems of others. Additionally, there are other, more effective planning tools to achieve your eventual 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. Few people would choose to be declared legally incompetent by a probate court. In short, the probate process can be an unpleasant inconvenience for your loved ones. It can be unnecessarily expensive, and may open your personal and financial circumstances to the public record. The most fundamental legal instrument for avoiding probate in the event of your incapacity is a Durable Power of Attorney. Through a Durable Power of Attorney, you can name your own back-up decision-makers and provide them with very limited or very broad powers. The legal authority of a Durable Power of Attorney, however, ends upon your death. Other methods are necessary to avoid the probate of your assets after death.

Death Probate and Estate Distribution

     Some state legislatures have authorized non-probate distribution methods for virtually every type of asset imaginable. Perhaps you have heard of such arrangements as Pay on Death bank accounts, Transfer on Death automobile titles, or even Beneficiary Deeds to real estate. These certainly are preferable distribution methods when compared to JTWROS. Nevertheless, probate may not be avoided unless all named beneficiaries are adults, have legal capacity, and survive you. Similarly, these methods do not facilitate federal estate tax minimization. Bottom line: Like JTWROS, statutory non-probate transfer methods should only be employed with an appreciation of the risks involved.

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, a RLT is a legal arrangement between three parties: the trust maker, the trust manager and the trust beneficiary(ies). You may (and many people do) choose to take on all three roles – as the maker of the RLT, the initial manager of the assets it controls, and as the initial beneficiary to enjoy the use of those assets. 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. It 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.

Final Thoughts

     Any planning method can fail to meet your goals to avoid probate, distribute your assets according to your wishes, or minimize your federal estate taxes if improperly applied or executed. Accordingly, it is important to seek qualified legal counsel and assistance to select and implement the appropriate solution for your unique circumstances.

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