Joint tenancy - a way to avoid probate? Maybe . . .Maybe not!

Joint tenancy is a form of holding title to property which includes a right of survivorship. When two people take title to property as “joint tenants,” the right of survivorship is either explicitly stated or implied. So if one owner dies, the title immediately vests in the survivor as a matter of law. The property doesn’t have to go through probate - in fact, since the property is already vested in the survivor, there is nothing left to go through probate.

There are four “unities” which must be present in order to create this right of survivorship:

1. Unity of time: both joint tenants must take title at the same time, by the same deed. At common law it used to be that if one joint tenant originally owned all of the property and he wanted to create a right of survivorship, he had to convey the property to a “straw man” who in turn would deed the property to the original owner and the co-owner as joint tenants. In modern times the need for the straw man is eliminated. In most states the original owner can convey from himself to himself and the other co-owner as joint tenants.
2. Unity of title: both tenants must have the same title to the property in the deed.
3. Unity of interest: all owners must have an equal undivided interest in the property. One can’t own 2/3 and the other own 1/3.
4. Unity of possession: both tenants must have a equal right to possess the whole property.

The foregoing explanation assumes there are only two co-owners. In fact, there can be more than two as long as the requirement of the four unities is met.

It sounds like this is a great way to avoid probate. Why doesn’t every body do this instead of a will?

Lots of married couples and couples with significant others do employ this technique as an estate planning tool. It works fine on the death of the first co-tenant, but then it ceases to work because there’s only one owner. At a minimum the couple should have a will as a back up to cover the contingency that something might happen to both of them at the same time.

When the parents get older, or there’s only one remaining parent, why not add the children to the title as joint tenants? Wouldn’t that avoid probate?

Putting your kids’ names on the property as joint tenants is a terrible idea!

Putting a child on the property as a joint tenant does avoid probate, and many parents do this in the belief that it will make things easier for the child when the parent dies. Nevertheless, it’s a bad idea for numerous reasons:

1. It makes the property subject to the child’s creditors’ claims because the child has a present interest in the property. If the child runs over a little old lady in the cross walk, the property may be at risk.
2. It means that the child will have to sign off if the parent needs to sell or refinance the property. Believe it or not, some children have been known to refuse to cooperate for fear of losing their interest in the property!
3. It means that, if the value of the child’s interest is larger than the annual gift tax exclusion (now about $13,000 per person per donee), the parent may have an obligation to file a federal gift tax return for the year in which the child’s name is put on the property.

Tax considerations . . .

In an earlier version of this page I wrote at some length about the possible loss of a stepped up tax basis if a child receives an interest in appreciated property as a joint tenant. I received a very nice letter from Brian E. Berkley, EA, who pointed out to me that my my discussion about a stepped up basis was in error. I researched his authorities, and I concluded that he was right.

Rather than attempt to correct my discussion -- which would turn out to be very complicated -- I have deleted my discussion of stepped up basis. This points out a very important lesson for all small business owners:

If you have a tax question, consult a tax professional!

Final thoughts . . .

This method of holding title can be a great estate planning tool for couples early in their lives and careers. It does facilitate a quick and easy transfer to the survivor and may avoid probate. This method of holding title by a parent and child is a terrible idea . . .it may avoid probate, but it can have substantial disadvantages.

It's always advisable to consult an estate planning attorney to get proper direction on how best to set things up. The cost will be very little in comparison with the expense of improper planning.

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