People sometimes look for shortcuts that sound effective on the surface, and this enters into the realm of estate planning. Joint tenancy is one of the shortcuts that you should understand thoroughly. You may want to take pause before you buy into the notion that it is an ideal estate planning solution.
Let’s look at the facts.
Co-Ownership of Property
Joint tenancy sounds kind of complicated, but in reality, it is simply co-ownership of property. Let’s say that you want your grandson to inherit your home after you pass away. If you make your grandson a joint tenant, he would own half of the home while you are living.
After you die, he would inherit your portion of the home, and he would own the home in its entirety.
One of the positives about joint tenancy is the fact that it facilitates probate avoidance. If you maintain sole, personal possession of the property and name your grandson as the inheritor in your last will, the transfer would not take place immediately. The property would become probate property at first.
The executor that you named in the will would admit the will to probate. Probate is the legal process of estate administration. The executor would take care of the hands-on administrative tasks, but the overall administration of the estate would take place under the supervision of the court.
Clearly, you want your grandson to inherit the property in a timely fashion. However, this will not happen when probate enters the picture. This process is time-consuming, and it can take close to a year in simple cases.
If the property is held in joint tenancy, the transfer would not be subject to the probate process.
Drawbacks of Joint Tenancy
We have provided an explanation of the positives, but there are also significant negatives. When you make someone a joint tenant, this individual owns half of the property right away. As a result, this portion of the property could be attached by the IRS or a creditor if the joint tenant was to run into financial, marital or legal problems.
This can be quite disconcerting. We live in a litigious society, and you never know when someone is going to be the target of a lawsuit.
In addition to the above, you could not sell the joint tenant’s portion of the property. You may need the liquidity and find that your hands are tied.
In the case of appreciated assets such as real estate and stock, a significant tax benefit known as a step up in tax basis will also be lost.
These drawbacks are considerable, and they are something to take into account when you are making estate planning decisions.
In this post we have just scratched the surface. If you would like to learn more about joint tenancy, ask for our special report.
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