Most people are aware of the fact that there are legally binding documents like wills and trusts that are used to facilitate postmortem asset transfers.These legal devices can be quite effective, but there are some asset transfers that would take place organically, even if there were no estate planning documents in place.
One way that assets can be transferred without the existence of estate planning documents would be through joint tenancy. A joint tenant is a co-owner of property.
To provide an example, if you own a home, you could add your daughter to the title or deed of the property. She would become a joint tenant.
Joint tenancy typically comes with right of survivorship. Because of this, after your death, your daughter would inherit the entirety of the home. This would be true if you had no estate planning documents, and it would be true if you had a last will.
We should plan out the fact that this transfer would not be subject to the legal process of probate. If you were the sole owner of the property, and you left the home to your daughter in your will, she would not assume ownership until the estate was probated and closed by the court. This can take close to a year, even if there are no complications.
Joint tenancy can facilitate asset transfers outside of probate, but there are some severe drawbacks to take into consideration. First and foremost, when you add a joint tenant, you are surrendering full ownership of the property. The person that you name as the joint tenant would own half of the property right away. You cannot remove the other person from title without his or her permission.
Because of this arrangement, the portion of the property that is owned by the joint tenant could come into play if your joint tenant gets a divorce. Plus, if the joint tenant was to fall behind on tax payments, a tax lien could be attached by the IRS or Franchise Tax Board.
In a nutshell, if the joint tenant runs into financial or legal problems, these problems become your problems as well.
Selling the property could also be quite problematic if you add a joint tenant, and this gives you less financial flexibility.
A potential major disadvantage to the joint tenant you add is the loss of a significant income tax benefit if the asset has appreciated in value, e.g., real estate or a stock portfolio. If, instead of adding them as a joint tenant, the same asset passes at your death, e.g., through a revocable trust, then the joint tenant would have the benefit of “stepped up basis” for calculating capital gains tax exposure.
Joint Tenancy Report
We have provided a bit of basic information about joint tenancy in this blog post. If you would like to learn more, download our special report. The report is free, and you can access your copy from the Reports section of this website.
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If you want to get assets into the hands of your loved ones after you pass away in an efficient manner while you protect your own interests, you have options. To explore them, please set an appointment with our office.