Frequently Asked Questions (FAQs)



Disadvantages of Joint Tenancy with Rights of Survivorship

 

As mentioned in the Overview, joint tenancy with rights of survivorship avoids probate. However, as an estate planning tool to transfer assets to heirs or beneficiaries, there are a number of disadvantages worth noting which makes this type of ownership less appealing for such purposes, such as:


  1. Step up in basis
    Basis is generally defined as the amount you paid for an asset, plus the cost of later improvements. One must be careful of the application of the rules that apply to basis, if an asset is inherited or passed by joint tenancy. If an asset is inherited, the basis under current law of the entire asset changes to the value of the property as of the date of death of the previous owner. The new owner receives a 100% step-up (or step-down) in basis. If the new owners sell the asset at that time, the new owners can avoid or reduce capital gains tax on the appreciation (i.e. the difference in value from the new basis and the actual value at the date of sale). However, if the asset is owned as a joint tenancy with rights of survivorship, then only the interest that passed from the deceased owner gets a step-up (or step-down) in basis. The basis for the interest owned by the surviving owner is unchanged. If the asset is then sold, the survivor may have to pay substantial capital gains tax on the appreciation on his portion of the asset.

  2. Gift taxes
    If you title an individual (other than a spouse), such as a child, as a joint owner on an asset, then you may be deemed to have gifted 1/2 of the property to that individual. If the value of that gift exceeds $13,000 (in 2009), a gift tax return must be filed and potential gift taxes paid.

  3. Loss of Ownership and Control
    Joint owners are legal owners of the asset. The asset cannot be sold, gifted, transferred or mortgaged without the approval of the other joint owners. If there are two or more joint owners, then in many jurisdictions they could force the asset to be sold.

  4. Creditor Exposure
    The asset is exposed to the creditors of all the joint owners. If a joint owner has credit issues, files for bankruptcy, is entangled in a lawsuit or is subject to a divorce proceeding, then the property could be subject to seizure, sale or collection.

  5. No Fiduciary Duty to Joint Owners
    Unlike the trustee of a trust, who has a fiduciary duty to the beneficiaries of the trust in the management of the trust assets, joint owners do not have any such fiduciary duty to the other joint owners. If a joint owners loses the property because of a debt, divorce proceeding or other issue, there is a little or no recourse for the remaining joint owners.

  6. Common Disaster
    If the joint owners die in a common disaster, the asset will be subject to a probate proceeding with the additional issue of determining which owner died first.