Joint Tenancy: Forms of Ownership and Will Substitutes

Example(s): John and Paul own a cabin on Crabtree Road as joint tenants. John dies and leaves everything he owns to his wife, Sally. However, his wife doesn't get John's share of the cabin. Because John owned the cabin as a joint tenant with Paul, the cabin now belongs to Paul.

During your life, each joint tenant owns the whole property and is generally entitled to use it as he or she likes. You can own most types of property as a joint tenancy with others. Real estate is the most common type of property, but you can own other property such as bank accounts, securities, and vehicles in a joint tenancy.

Technical Note: A joint tenancy is actually called a joint tenancy with rights of survivorship.

When Can It Be Used?

You have property that can be held in joint tenancy under the laws in your state. In general, joint tenancy is an option in every state, but some states restrict the types of property that can be held in joint tenancy. Other types of property, such as an IRA, can't be owned in joint tenancy in any state.

Strengths

Avoids the Expense of Probate

Probate can be expensive, and the largest expense is generally the attorney's fees, which can be especially expensive if set as a percentage of the gross probate estate. If you avoid probate with a joint tenancy, your estate can reduce these fees.

Tip: Negotiating an hourly rate or flat fee may result in a more reasonable fee.

The person responsible for managing your estate during the probate process (your personal representative) is entitled to a fee for these services, although a friend or relative serving as a personal representative may agree to serve without a fee.

Prevents Additional Probate Proceedings for Property Owned In Other States

Property that you own in another state must go through a separate ancillary probate in that state unless it can be excluded from probate (for example, by owning it as a joint tenancy).

Example(s): If you own a home in Massachusetts, a cabin 60 miles away in New Hampshire, and a time-share condominium in Colorado, your estate will be probated in all three states. Although each state will probate only the property located in that state, each probate proceeding significantly increases the expense and delay of the entire process.

Minimizes Delays in the Transfer of Property

Probate takes an average of 12 months and may last for several years. All of the probate property generally won't be distributed until the process is completed. Transferring property automatically by owning it as a joint tenancy provides for a quicker transfer of the property.

Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your personal representative is responsible for managing the property until probate is complete, he or she may not have the expertise or authority to make significant management decisions and the property may lose value. Owning the property as a joint tenancy will transfer the property automatically and result in a smoother management transition.

Discourages Interference with Your Plans to Distribute Your Property

Although it seems that anybody can bring a lawsuit, a will is generally much easier to challenge than a transfer of property by joint tenancy.

Circumvents Some Limits on Your Power to Transfer Property

State law may limit your ability to leave property to charity. For example, some states invalidate any bequest to charity written within a month of your death. Other states won't let you leave more than a certain percentage of your property to charity. These laws generally don't apply to property transferred automatically because it was owned as a joint tenancy.

State law may also force you to leave a certain percentage of your property to your spouse. In some states, these laws don't apply to transfers resulting from the holding of property as a joint tenancy at the time of death.

Is Relatively Simple and Inexpensive to Implement

In most instances, taking title to property as joint tenants is not complicated. Many couples purchasing a home will take title as joint tenants without any planning. Generally, you will not need to involve an attorney to create a joint tenancy. When purchasing a home, however, there are often other good reasons for involving an attorney.

Caution: Since your state may require you to use certain unambiguous language when creating a joint tenancy, it might be wise to consult with an attorney to confirm that you have actually created a joint tenancy.

Has Intangible and Emotional Benefits

Couples will often decide to own property as joint tenants because it conforms to their feelings of partnership, faith, and unity. Planning to transfer the family home automatically to the surviving spouse may create a sense of well-being.

Caution: Your family may not actually be able to keep the home if you have not provided for the future payments on it.

May Shield Property from the Creditors of the Joint Tenants

In some states, one joint tenant's creditors cannot attach property held as a joint tenancy. However, some states only extend this protection to married couples holding property as joint tenants. Your joint tenant will be subject to less capital gains tax exposure if he or she sells the property than if you had given them the property during your life. In general, you are subject to capital gains taxes on the difference between what you "paid" for property and what you get when you receive it. However, after your death, your joint tenant will be treated as having "paid" whatever your interest in the property was worth at your death.

Technical Note: This increase in what your joint tenant is considered to have "paid" for the property is called a step-up in basis.

Example(s): Years ago, Darren and Liz (husband and wife) bought a condo as a rental property for $10,000 and owned it as joint tenants. Darren died when it was worth $100,000. Fifty percent of the property's value was included in Darren's gross estate for estate tax purposes. The IRS treats Liz as though she paid $55,000 for the property. If Liz sells the condo for $100,000, she will have a capital gain of $45,000. If Liz had owned the condo outright, her capital gain would have been $90,000. However, if Darren had owned the condo outright and left it to Liz at his death, her basis would have been stepped up to fair market value, $100,000, and she would have no capital gain.

Tip: If certain requirements are met, an individual may exclude up to $250,000 of capital gain from the sale of his or her principal residence. A married couple that files a joint federal income tax return may exclude up to $500,000.

Tip: If you're unmarried and own your principal residence jointly with another unmarried individual, each of you may be eligible to exclude from gross income up to $250,000 of gain from the sale of the home.

Allows You to Shift Income and Capital Gain to Someone Who Is In a Lower Tax Bracket

By holding income-producing property as a joint tenancy, you can shift some of the income produced by that property to your joint tenant. You can also shift capital gain resulting from the sale of appreciated property.

May Minimize the Taxable Value of Your Property, Reducing Federal Gift Tax and Potential Federal Estate Taxes

Creating a joint tenancy may allow you to take advantage of a valuation discount that makes your property worth less in the eyes of the IRS. This discount could minimize federal gift tax and potential federal estate tax consequences.

Tradeoffs

Making Someone Your Joint Tenant Is an Irrevocable Grant of an Interest in That Property

Once you have made someone your joint tenant, that person can be a co-owner of that property for the rest of his or her life. If your co-owner is the last living joint tenant, he or she owns the property outright and can do what he or she wants with it.

You Are Giving Your Joint Tenants (And Possibly Their Creditors) Unlimited Access to the Property

Each joint tenant has the right to use the property. Sharing ownership may be acceptable now, but could become intolerable in time, especially if your joint tenant surrenders or loses his or her interest to a third party. In this instance, the third party would not be a joint tenant with you, but a tenant in common.

Example(s): Assume a mother and son own a house as joint tenants and that the son and his wife divorce. The former wife may receive an interest in the house as a result of their divorce, and have the right to prevent a sale or refinancing of the portion of the property she now holds as a tenant in common.

May Not Be Appropriate If You Have a Large Estate

If you are married and own more than the federal estate tax applicable exclusion amount ($11,580,000 in 2020, $23,160,000 per married couple) in property as a couple, there may be a significant tax advantage in leaving some property to someone other than your spouse. If you make your spouse your joint tenant, you may be unable to take advantage of this strategy for that property. The availability of portability (the estate of a deceased spouse can transfer any unused exclusion to the surviving spouse) in 2011 and later years may make planning easier.

Caution: If your estate is this large and you are considering owning property in joint tenancy, you should meet with an attorney or tax professional regarding options to minimize potential federal and/or state estate taxes.

Your Interest In Property Held As a Joint Tenancy Is Guaranteed to Go to Your Joint Tenants If You Die Before They Do

You cannot leave your interest in property held as a joint tenancy to anyone in your will. Your interest passes automatically to your surviving joint tenant(s).

Tip: However, you might be able to prevent passing your interest to your surviving joint tenants by legally dividing the property into separate pieces. You'll need an attorney's assistance to do so.

You Cannot Control How the Property Will Be Used After Your Death

The surviving tenant has complete control over the property, which could result in an accidental disinheritance.

Example(s): Fred and Wendy own a house as joint tenants. Fred dies and Wendy, as the surviving joint tenant, owns the house outright. Wendy marries Richard, makes Richard her joint tenant, and then dies. Richard owns the house outright. Fred and Wendy's daughter, Pam, will receive nothing, which Fred never intended.

Joint Tenant May Be Able to Unilaterally Terminate the Joint Tenancy

Your creation of a joint tenancy is irrevocable. You cannot take back your joint tenant's right to the property. However, your joint tenant may be able to terminate the joint tenancy and keep a separate, transferable interest in the property.

Example(s): Larry owns a parcel of land and makes Gary his joint tenant, with the intention that the survivor will own the entire parcel. Gary goes to court and asks the court to divide the parcel into separate, equal portions and to make him the sole owner of one of those portions. The court divides the parcel, and Gary is now free to leave his one-half of the parcel to anyone he wants. Upon the division, Larry and Gary cease being joint tenants and become tenants in common.

Technical Note: A joint tenant may be able to deed his interest in the property to himself or someone else. This destroys the joint tenancy and makes each owner a tenant in common. By doing so, the joint tenant has prevented his interest in the property from being transferred to his joint tenant on his death. The joint tenant may also be able to bring suit to have the property split into separate parcels.

Does Not Give Your Co-Owner the Legal Right to Manage or Dispose of the Property If You Become Incompetent

If you become incompetent, your joint tenant will be unable to exercise control over the property, even on your behalf, based on the joint tenancy.

Example(s): If a couple owns a house as joint tenants and the husband becomes incompetent, his wife does not have the right to sell or mortgage the property to pay for his care. She will need to have a guardian appointed, unless she has his durable power of attorney, a document that gives her the legal right to act on his behalf.

The Creation of a Joint Tenancy May Result In Federal Gift Tax Liability

Creating a joint tenancy is a gift (which may be subject to gift tax) if you are giving someone ownership of property that they didn't pay for.

Example(s): If you own a house and make your daughter your joint tenant, you have made a gift that may be subject to gift tax. Similarly, if you and your brother buy a $100,000 cabin, but you put up $99,000 and he put up only $1,000, you have made a gift of $49,000 which may be subject to gift tax.

Tip: Such a gift between spouses is exempt from gift tax because of the unlimited marital deduction. A gift to someone else might be exempt from gift tax, at least in part, because of the $15,000 (in 2020) annual gift tax exclusion.

The Value of Your Interest in the Property May Be Included In Your Estate for Estate Tax Purposes

You may be subject to federal estate taxes on your ownership interest in the property. If your joint tenant is your spouse, your ownership interest is 50 percent of the fair market value (FMV) of the property, regardless of your respective contributions. If your joint tenant is not your spouse, your ownership interest will be 100 percent unless you can prove contributions were made by the other owner(s).

Example(s): Lori and Rose buy a $100,000 cabin as joint tenants. Lori contributes $75,000 and Rose contributes $25,000. If Lori dies and the cabin is worth $200,000, Lori's estate may be subject to an estate tax on $200,000 — 100 percent of the properties present FMV — unless the estate can establish that Rose contributed one-fourth of the purchase price. If the estate proves this, $150,000 would be included in Lori's estate.

May Create Problems for Business Owners Seeking to Take Advantage of Certain Estate Planning Strategies

A business owner can take advantage of certain estate tax strategies (such as Section 303 death tax redemptions, Section 2032A special use valuations, and Section 6166 deferral of estate taxes) if his or her interest in the business represents a large enough percentage of his or her total estate. However, if the business interest is owned jointly, only his or her proportionate ownership interest in the business will be included in his or her gross estate and he or she may not pass the ownership test. Therefore, if you anticipate using one of these techniques, joint ownership might be disadvantageous.

How to Do It

Evaluate the Desirability of the Strategy

Because taking title to property as joint tenants is simple and inexpensive, it is a very common way to own property. Thus, you may be unduly biased in favor of forming a joint tenancy when you might be better served by another planning strategy. You should compare the strengths and tradeoffs of a joint tenancy with those of alternative strategies.

Tip: You might want to meet with an attorney or tax professional to discuss how this strategy would affect your overall estate plan.

Verify That a Joint Tenancy with Rights of Survivorship Is Being Created

The law in several states is biased against the creation of joint tenancies, and a joint tenancy will not be established if the correct language is not used.

Example(s): In some states, the deed must state that title is taken "as joint tenants with right of survivorship and not as tenants in common." You might consider consulting an attorney or other advisor to determine the exact language required.

Confirm That Joint Tenancy Doesn't Interfere With Other Estate Planning Strategies

Property held as a joint tenancy may interfere with other strategies you may have implemented, such as a credit shelter trust or living trust. You should determine how, under your present estate plan, your property will be distributed on your death to ensure that unintended consequences do not arise.

Tax Considerations

Income Tax

The Surviving Tenant May Receive a Stepped-Up Basis in Your Interest in the Property

Your ownership interest in the property may be subject to estate taxes, but your surviving joint tenant may receive a stepped-up basis in that interest.

Example(s): Years ago, Dick and Martha (husband and wife) bought their house for $10,000 and held it as joint tenants. Dick died when the property was worth $100,000. Because they owned the house as joint tenants, 50 percent of the value of the property was subject to Dick's estate taxes. Martha's basis in the property is now $55,000 — Dick's 50 percent interest that has been stepped up and her $5,000 basis (one-half of the purchase price). If Martha sells the house for $100,000, she will have a capital gain of $45,000 ($100,000 minus the $55,000 basis). (If Martha had owned the house outright, her capital gain would be $90,000.) However, if Dick had owned the house outright and left it to Martha at his death, her basis would be $100,000 and she would have no capital gain ($100,000 sale price minus $100,000 basis).

Tip: If certain requirements are met, an individual may exclude up to $250,000 of capital gain from the sale of his or her principal residence. A married couple that files a joint federal income tax return may exclude up to $500,000.

Tip: If you were sure which spouse would die first, you could transfer the property to that spouse, and the surviving spouse would receive a 100 percent step-up in basis if the deceased spouse bequeaths it to the surviving spouse. This would not apply, though, if the spouse receiving the gift died within one year of the gift. The problem is that you can't be absolutely sure and, if you are wrong, the surviving spouse receives no step-up in basis.

Holding Property as a Joint Tenancy May Shift Income or Capital Gain

Holding income-producing property as a joint tenancy shifts the income produced by that property to your joint tenant in proportion to his interest in the property. It also shifts capital gain resulting from the sale of appreciated property.

Example(s): If Marie buys a condominium for $100,000, then sells it for $200,000 and gives one-half of the proceeds to Annie, she will have made a gift with a taxable value of $100,000 and would owe income tax on $100,000 in capital gain. Instead, if Marie buys the condo for $100,000, makes Annie her joint tenant, and they sell the property for $200,000, Marie will have made a gift with a taxable value of only $50,000, and Annie would owe the tax on $50,000 of capital gain.

Gift Tax and Estate Tax

The Creation of a Joint Tenancy Is a Gift That May Be Subject To Gift Tax

Creating a joint tenancy is a gift (that may be subject to gift tax) if you are giving someone ownership of property that they didn't pay for.

Example(s): If you own a house and make your daughter your joint tenant without receiving fair market value in return, you have made a gift that may be subject to gift tax. Similarly, if you and your son buy a $100,000 piece of property for which you put up the entire $100,000, you have made a gift that may be subject to gift tax.

Tip: Gifts between spouses are exempt from gift tax because of the unlimited marital deduction.

Your Estate May Be Subject to Estate Taxes on a Portion of the Value of The Entire Property

Your estate may be subject to estate taxes on your ownership interest in the property. If your joint tenant is your spouse, your ownership interest is 50 percent of the fair market value of the property. There is no resulting estate tax liability because of the unlimited marital deduction. Your spouse's basis in that 50 percent of the property may be stepped-up to the fair market value of the property at your death.

Caution: There has been no use of the applicable exclusion amount in this situation that could result in a higher overall estate tax liability for you as a couple. If your joint tenant is not your spouse, your ownership interest is 100 percent of the value of the property unless the estate can prove that you contributed less than 100 percent to the acquisition of the property. In that case, your estate will reflect your percentage of the acquisition multiplied by the value of the property.

Example(s): Eric and Jim bought a $1 million piece of property. They held it as joint tenants. Eric contributed 75 percent of the purchase price. At Eric's death, the property is worth $1 million. Seventy-five percent of that amount, $750,000, may be includable in Eric's estate for estate tax purposes as long as his estate can prove that he paid only 75 percent of the purchase price. Now assume that Eric and Jim kept poor records and Eric's estate cannot establish how much of the purchase price Eric contributed. One hundred percent of the property's value would then be includable in Eric's estate.

Technical Note: This is called the consideration furnished test. It means that when property is held in joint tenancy, the value of the property included in a joint tenant's estate for estate tax purposes is the value of the property attributable to the percentage of the purchase price you furnished.

Gift Tax and Estate Taxes May Be Assessed on a Lower Value If Property Is Divided With Joint Tenancy

The value of the gifted joint tenancy and the remaining joint tenancy interest may have a smaller value because of the fractional interest discount rule, which recognizes that property has a lower fair market value when it is owned as a joint tenancy.

Questions & Answers

Why Isn't Property Held As a Joint Tenant Subject to Probate?

When one joint tenant dies, his or her interest in the property is automatically transferred to the surviving tenant. It does not pass through probate and cannot be transferred to a different individual through your will or otherwise.

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