Joint Tenancy

April 13, 2006

	Visited: 141
	Not rated
	Rate:

If no homestead exemption is available when asset exemption planning, there are various types of home ownership that may provide additional protections. In states that do not allow ownership in tenancy by the entirety, married couples typically own their home in joint tenancy.

Joint tenancy is available to any combination of individuals, and not simply spouses. Moreover, the number of co-owners is not limited to two. However, as with a tenancy by the entirety, the owners usually must take equal interests, at the same time, and through the same deed or other instrument.

This form also shares the following characteristic with tenancy by the entirety: If one owner dies, the survivor automatically, by operation of law, inherits the decedent's interest, regardless of any provisions in a will.

However, a co-owner in joint tenancy, including a spouse, may freely sell his or her interest without the other's consent. Thus, it follows that creditors of one of the joint tenants can reach the debtor's interest in property owned in this form. Thus, joint tenancy does not offer the protection that is provided by tenancy by the entirety.

In the case of a married couple owning a home in joint tenancy, the creditors of one spouse could reach the half-interest owned by the debtor-spouse. Once this was done, the creditor could force a sale of the property, through a partition proceeding in state court, and use half of the proceeds (the debtor's share of the property) from the sale to pay off the debt. (This all assumes, of course, that a homestead exemption did not protect the property.)

Warning

Sometimes, individuals who solely own property create a joint tenancy in the property with another person, usually a close relative, to avoid probate court.

Because joint tenancy includes a right of survivorship, this strategy works. Upon the death of one owner, the survivor automatically, by operation of law, acquires the decedent's interest. No probate court proceeding, and no deed or other transfer document, is necessary.

However, this strategy also can carry significant risks. For example, let's say a widow with two children creates a joint tenancy in her home and bank account with one of the children for the purpose of avoiding probate court. A joint tenancy creates immediate rights in the other owner. The one child could now force a sale of the home through a partition proceeding, pocket half of the sales proceeds, and possibly leave the mother homeless.

In addition, this one child could withdraw 100 percent of the bank account, and the bank would have no liability, because any owner in joint tenancy has the right to use the property (even if they are only a half-owner).

Upon the death of the mother, the other child would be left with nothing. A verbal agreement (a common occurrence in these situations) among the three that the co-owner would share the inheritance with his or her sibling would usually be unenforceable.

Keep in mind, too, that a joint tenancy overrules provisions in a will. A common error is for individuals to leave certain property in their wills to designated beneficiaries, not realizing that the property is owned in joint tenancy and will automatically pass to the surviving owner of the property regardless of anything in the will.

If this probate court avoidance strategy is to be used, the transferor should be aware of the risks involved. Moreover, it must also be understood that for the transfer to be effective, the transferor usually should transfer equal shares in the property to himself and the other party. Technically, a conveyance of a half-interest to the other party only creates a tenancy in common, with no right of survivorship (however, banks will frequently ignore this technicality in their treatment of bank accounts).

Work Smart

If your goal is to avoid probate court, there are better alternatives. For example, you can quickly establish a simple trust for bank accounts by asking your banker to set up a Totten trust. All that's necessary is filling out a simple form.

This type of trust makes the owner of the account the trustee of the account, but importantly gives the owner of the account exclusive rights to the property during his or her life. At the owner's death, the account automatically passes to the named beneficiaries. This is superior to a joint tenancy in this situation, as the beneficiaries have no rights in the property during the account holder's life.

A similar type of simple trust can be used for ownership of a home, where the intent is to avoid probate court. However, in that case, the owner would have to pay an attorney to have the trust form drafted (see our discussion of trusts).