Joint Tenancy Travails & Alternatives to JTWROS
Joint Tenancy Travails
Joint tenancy with rights of survivorship (JTWROS) is a very common legal method for married couples to hold the title for many of their most common assets, such as the family home. JTWROS is not limited to married couples. Single adults may also take title as JTWROS to assets with non-spouses.
This common form of asset ownership has its benefits, but it also has some drawbacks. While it is not an exhaustive treatise on the topic, we will explore both alternatives below.
The Definition of Joint Tenancy
First, it is important to understand what JTWROS is and how it works. It is a form of asset ownership where two or more individuals hold title together. However, what distinguishes it from other types of co-ownership is its "survivorship" feature. At the death of one joint tenant, any surviving joint tenant automatically continues to own the entire asset held in JTWROS. This is known as the “right of survivorship."
In some states, a joint tenancy between a husband and wife is known as a tenancy by the entirety for some or all types of assets. Each spouse is deemed to own a 100% interest in any asset so held. Tenancy by the entirety also has some benefits that are not available under JTWROS. For example, the creditors of one spouse cannot attach the 100% interest of the other "innocent" spouse.
The Definition of Tenancy in Common
A tenancy in common is another type of co-ownership of an asset. This involves ownership by two or more people together without the rights of survivorship of a joint tenancy. It works like this: when a co-owner dies, his or her interest does not pass to the surviving owner or owners. It is instead distributed according to his or her will. If he or she does not have a will, then state law will dictate who inherits that share. Therefore, if three brothers own an undivided interest in the home they inherited from their parents and one dies, the other two do not automatically inherit that brother’s share and become 50-50 owners. The decedent’s interest passes as he directed in his will or, if he has no will, by state law (in many instances, to his spouse).
Advantages of Joint Tenancy
There are several advantages to holding property in JTWROS. These benefits include:
- The property will pass directly to the survivor without going through probate. In fact, a death certificate is typically all that is required to establish the survivor’s ownership in the asset;
- It is an effective and economical way to pass title to assets when the first to die wants all of his or her assets to pass outright to a surviving joint tenant;
- It provides continuity of ownership, particularly when a surviving spouse will continue to reside at the home; and
- A joint household banking account can provide a married couple immediate access to funds, if one spouse dies unexpectedly or becomes incapacitated.
Disadvantages of Joint Tenancy
There are some distinct disadvantages associated with holding title to assets in JTWROS, many of which involve court proceedings and legal expenses:
- The original owner who placed the assets in a joint tenancy is no longer the sole owner;
- If the original owner wants to later sell a JTWROS asset, then all of the other joint tenants must agree to the sale and cooperate;
- Whenever you add anyone as a joint owner on any of your assets, then such assets will be subject to the potential divorces, lawsuits and bankruptcies of all joint owners;
- If a legally disabled adult is a joint owner, then there may be the need for conservatorship proceedings to appoint a conservator. It may also be necessary to receive the probate court’s permission to use the asset for that disabled owner;
- If co-owners in a joint tenancy disagree, legal proceedings may be needed to determine the rights of the owners to the asset; and
- The asset may not be available to the executor of a deceased joint owner’s estate, which means that the executor may need to sell other assets to pay taxes or generate cash to settle the affairs of the decedent.
So, if I Have a Joint Tenancy, I Don’t Need a Will, Right?
No, not even close. A will controls all of the testator’s assets when there is no surviving joint owner or no surviving beneficiary (e.g., on a life insurance policy, retirement plan or annuity). In the absence of a will, state law will determine who inherits such assets.
Consequently, even if you are relying on JTWROS planning to control the distribution of your assets, be sure to create a will should you run out of surviving joint owners. This is really “cheap insurance” to help make sure that your assets are distributed according to your estate planning objectives.
Alternatives to JTWROS
Although many people plan their estates by design or default using joint tenancy with rights of survivorship (JTWROS), just as many look for ways to avoid probate without the drawbacks of JTWROS. Here is a quick review of several commonly used alternatives to JTWROS.
Pay on Death, Transfer on Death, Beneficiary Deeds
Many states have non-probate transfer statutes that provide for the disposition of many types of assets at death, without requiring potentially time-consuming and expensive probate proceedings. These laws have also eliminated some of the disadvantages of joint tenancies.
It is recommended that you determine whether a simple pay-on-death (POD) designation is available under your state laws for your savings and checking accounts, as well as on certificates of deposit. Unlike JTWROS, you remain in control of the money in the account (to spend as you wish) and the POD beneficiary has no rights to the money. However, upon your death, the beneficiary can claim the money directly from the bank without waiting for it to pass though probate.
If your state law permits, other assets can pass in the same manner as POD. For example, you may be able to arrange for titled assets such as securities and even your motor vehicles to transfer-on-death (TOD) to your chosen beneficiary. Without subjecting these assets to the risks of JTWROS during your lifetime and probate at your death, TOD arrangements are a popular option. The beneficiary works directly with the brokerage or DMV to transfer the account or motor vehicle upon presentation of your death certificate.
What about real estate? More than half of all states have laws authorizing beneficiary deeds to transfer real estate. It is similar to a POD or TOD, except it is for real estate. You only need to sign and record the beneficiary deed (while you are alive) for the transfer to be effective upon your death. The beneficiary deed is revocable and the property may be sold at any time. A different beneficiary may be designated and that beneficiary has no rights until your death.
Another benefit of POD, TOD and beneficiary deed arrangements is that no present interest is transferred, so no potential gift tax liability is triggered.
Although these alternatives may be preferable to JTWROS, they are still not fool-proof substitutes for a will. What happens if your beneficiaries die before you can revise your non-probate transfer arrangements?
Revocable Living Trusts
Another popular alternative to joint tenancy is to create a revocable living trust to hold title to your assets during your lifetime and then distribute them according to your instructions at your death, without probate.
The key to any successful revocable living trust is to properly “fund” it. Similar to a fine automobile without fuel in the tank, a revocable living trust is not going anywhere if it does not directly hold title to your assets now or by beneficiary designation later. However, great care must be taken when planning beneficiary designations, especially when it comes to distributions from retirement plans.