People often set up bank accounts or real estate so that they own it in joint ownership with a spouse or other family member. The appeal of joint tenancy is that when one owner dies, the other will automatically inherit the property without it having to go through probate. Joint ownership of property is also perceived to be easy to setup since it can be done at the bank when opening an account or title company when buying real estate.
That’s all well and good, but joint ownership can also cause unintended consequences and complications. And it’s worth considering some of these, before deciding that joint ownership is the best way to pass on assets to your heirs.
Florida law provides for three different options for joint ownership of assets: tenants in common, joint tenants with right of survivorship and tenants by the entirety. A basic knowledge of the differences between those forms of ownership will help you choose the “right” type of ownership for you and your loved ones.
- Tenants in Common. Tenants in common each own outright a proportionate share of the asset(s) owned as tenants in common. For instance, if there was two owners as tenants in common, then each of them owns a one half interest in the entire asset. Each tenant has total control over his or her share of the asset. One tenant in common can sell her ownership interest of the asset to a third party, has the ability to transfer that ownership interest to anyone she chooses at her death, by will or trust, and there is no survivorship rights for the other owner.
- Joint Tenants With Right of Survivorship. Joint tenants with right of survivorship (JTWROS) is a form of ownership where each of the owners has an undivided ownership interest in the asset that is proportionate to the number of co-owners. If there are two co-owners then each of the owners has a 1/2 interest in the asset. If there are three owners, then each has a 1/3 interest, etc. But, JTWROS ownership means that upon the death of one co-owner, the other co-owners become the owner of the deceased owner’s interest. Accordingly, with JTWROS an owner is unable to direct where their proportionate share of the assets will be distributed upon death – the deceased owner’s interest will pass proportionately to the surviving owner(s) at death. When an asset is titled as JTWROS, one owner cannot sell or transfer his or her interest in the assets without the agreement of the other joint owners. A creditor of one of the joint owners can seek to collect from the joint owner’s beneficial interest in the property, and can in fact seize the ownership interest of the assets to satisfy the judgment creditor’s claims against the joint owner.
- Tenants by the Entirety. Tenants by the entirety is a form of ownership that is limited to husbands and wives. The joint ownership of the asset is by the marital unit, rather than the individual husband and wife. The separate owners of the assets cannot legally transfer their ownership interest to a third party except with the other spouse joining in with the transfer. A tenancy by the entirety is afforded a unique kind of protection from creditors of just one of the spouses. For instance, if a judgment creditor has a judgment against the wife, and does not have a similar judgment against the husband, then the creditor is not permitted to acquire a lien against property that is owned as tenants by the entirety.Thus, unless a given creditor has a judgment against both husband and wife, assets owned as tenants by the entirety are not subject to the claims of the individual spouse’s creditors.
So let’s explore some of the common problems that can arise when relying on jointly owned property.
The other owner’s debts become your problem.
Any debt or obligation incurred by the other owner could affect you. If the joint owner files bankruptcy, has a tax lien, or has a judgment against them, it could cause you to end up with a new co-owner – your old co-owner’s creditors! For example, if you add your adult child to the deed on your home, and he has debt you don’t know about, your property could be seized to collect that debt. Although “your” equity of the property won’t necessarily be taken, that’s little relief when the house you live in is put up on the auction block! Even with assets owned as tenants by the entirety, when one spouse dies, the surviving spouse no longer has the protection of the tenants by the entirety form of ownership. If the surviving spouse has creditor claims, immediately upon the death of the deceased spouse, the creditors of the surviving spouse can proceed against the formerly protected assets to satisfy their claims.
Your property could end up belonging to someone you don’t intend.
Some of the most difficult situations come from blended families. If you own your property jointly with your spouse and you die, your spouse gets the property. On the surface, that may seem like what you intended, but what if your surviving spouse remarries? Your home could become shared between your spouse and her second spouse. And this gets especially complicated if there are children involved: Your property could conceivably go to children of the second marriage, rather than to your own.
You could accidentally disinherit family members.
If you designate someone as a joint owner and you die, you can’t control what she does with your property after your death. Perhaps you and an adult child co-owned a business. You may state in your will that the business should be equally shared with your spouse or divided between all of your kids; however, joint ownership goes to the survivor – regardless of what you put in your will.
You could have difficulty selling or refinancing your home.
All joint owners must sign off on a property sale. Depending on whether the other joint owners agree, you could end up at a standstill from the sales perspective. That is unless you’re willing to take the joint owner to court to force a sale of the property. (No one wants to sue their family members, not to mention the cost of the lawsuit.)
And what if your co-owner somehow becomes incapacitated, through accident or illness? In that case, you may have to petition a court to appoint a guardian or conservator to represent the co-owner’s interest in the sale. While you and your co-owner always worked together, an appointed guardian may see his responsibility as protecting the other owner’s interest–which might mean going against you.
You might trigger unnecessary capital gains taxes.
When you sell a home for more than you paid for it, you usually pay capital gains taxes–based on the increase in value. Therefore, if you make an adult child a co-owner of your property, and you sell the property, you’re both responsible for the taxes. Your adult child may not be able to afford a tax bill based on decades of appreciation.
On the other hand, heirs only pay capital gains taxes based on the increase in value from when they inherited the asset, not from the day you first acquired it. So often, while people worry about estate taxes, in this case–inheriting a property (rather than jointly owning it) could save your heirs a fortune in income tax. And with today’s generous $5.49 million estate tax exemption, most of us don’t have to worry about the estate tax (but the income tax and capital gains tax hits almost everyone).
You could cause your unmarried partner to have to pay a gift tax.
If you buy property and place it in joint ownership with an unmarried partner, the IRS will consider that to be a taxable gift to your partner. This can create needless paperwork and taxes.
So what can you do? These decisions are too important and complex to be left to chance. Consult a law firm that specializes in estate planning. An experienced lawyer will help you decide the best way to manage your property to meet your needs, objectives and goals.
Our team can assist you in planning to reduce estate taxes, avoid potential legal pitfalls, and set up a trust to protect your loved ones. We understand not only the legal issues but the complex layers of relationships involved in estate planning. We’ll listen to your concerns and help you develop a plan that gives you peace of mind while achieving all of your goals you have for your family. Contact us today for a consultation.