Are there Problems with using Joint Tenancy as an Estate Planning Tool?

by | Aug 4, 2017 | Uncategorized

Joint tenancy is sometimes used as a tool to avoid probate in New Mexico. To explore the ramifications of joint tenancy as an estate planning device, let’s use the example of railroad paymaster, David Gallup and his wife Rita. Mr. and Mrs. Gallup have three children: Felix, John, and Annie.

David and Rita Gallup have four basic estate planning options: 1) Inaction; 2) Wills; 3) Joint tenancy; and 4) Revocable Trust (also known as a Living Trust).

What is Joint Tenancy?
Joint tenancy is a common form of ownership of both real property (e.g. land) and personal property (e.g. bank accounts, investment accounts, stocks, and bonds). Joint tenancies are simple to create. Joint tenancies include the right of survivorship, which means that upon the death of one joint tenant, the other joint tenant or tenants become the sole owner or owners of the property. If property is held in joint tenancy, the joint tenancy “trumps” or supersedes both a Will or a Trust.

Although joint tenancies are simple to create, there are sometimes complicated legal ramifications that arise:

Consent and Division of Proceeds
If David and Rita Gallup add their three children, Felix, John, and Annie, to the title of their home on Green Street, they create a situation where the consent and signature of their children will be required to re-finance or sell their home. Additionally, the children will be legally entitled to an equal share of the proceeds from the sale of the property when it is sold, even if David and Rita are still alive.

Exclusion
For the sake of management, if David and Rita Gallup only add their oldest son Felix as a joint tenant to the property, the other children, John and Annie are at risk of being excluded after death. Because joint tenancy inherently includes the right of survivorship, others who are not named as joint tenants are deprived of the right to the property upon the death of all but the last joint tenant.

Gift Tax
By placing their children into title as joint tenants, David and Rita Gallup have created a transfer gift of property which may have tax consequences. Depending on the value of the interest that is transferred, a gift tax return may need to be filed. A decision to place a significant property interest in joint tenancy should only be made after discussing the matter with a tax attorney or other competent tax adviser.

Immediate Access
Joint tenancies can be created with both real estate and personal property. When created with personal property such as bank accounts, the joint tenant has the immediate right to withdraw all of the funds in the bank account.

Creditors
If David and Rita Gallup have added all of their children to the title of their home on Green Street, the judgments or tax liens of their children attach to the property. John’s judgment to a credit card company or Annie’s tax lien will attach to the property and create problems even if David and Rita are still alive. While joint tenancy is sometimes attractive because of its simplicity, the legal pitfalls associated with joint tenancy generally outweigh the advantages.

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