The Dangers of Owning Real Property in Joint Tenancy

Joint tenancy is one way to avoid probate on real property but in many cases can be a very bad idea.  “Joint tenancy with right of survivorship” means that each person owns an undivided equal share of the property. When one owner dies, that person’s share immediately passes to the other owners in equal shares, without going through probate. It’s often stated that joint tenancy can be a simple and inexpensive way to avoid probate, and this is sometimes true. But the potential tax and legal problems of joint tenancy ownership can be severe. Here are just a few of the dangers of joint tenancy:

  1. Probate is not eliminated, it is only delayed. When either joint tenant dies, the survivor immediately becomes the owner of the entire property by operation of law. But when the survivor dies, the property must then go through probate. So, joint tenancy doesn’t avoid probate, it simply delays it. In most cases, a much better way to avoid probate is to create a revocable living trust and have your home or other real property put into your trust via grant deed.
  1. Unintentional disinheriting. When blended families are involved, children from previous marriages will likely get disinherited. For example, Jim and Sue are married and each has children from previous marriages. When Jim dies, Sue becomes sole owner of the property. When Sue dies, the property will likely go to her children, leaving nothing for John’s children.
  1. Gifts can affect Medicaid/Long-Term care. When you place a non-spouse on your property as a joint tenant, you make an immediate gift of one-half the value of the property. For example, when a mother re-titles her $400,000 home in joint tenancy with her son, she has just given her son a $200,000 gift. It should be noted that there can be severe consequences if any gifts are made within five (5) years of entering a nursing home and applying for Medicaid benefits.
  1. Restricts your right to sell or mortgage. Joint tenancy subjects the property to each owner’s financial dealings. Neither joint tenant has the right to mortgage or sell his interest without the other owner.
  1. Potential IRS problems. If either owner fails to pay income taxes, the IRS can place a tax lien on the property. If either owner files for bankruptcy, the trustee can sell that person’s interest in the home.
  1. Exposure to court judgments. If either party has a judgment entered against him, such as from a car accident or business dealings, the holder of the judgment can and will execute the judgment against the home. Additionally, if either owner goes through a divorce, the property can become part of the divorce settlement.
  1. Irrevocable decision & loss of control.Once you allow a person to be a joint tenant on your home or account, you cannot remove them without their approval. It is an irrevocable decision, so think twice before you do this.  This is very common in the situation where there is land or property in the family and all of the siblings are named as joint tenants. This could be very problematic if one of the owners wants to sell their “share” of the property. Additionally, any one of the joint tenants could request that the asset be divided up, which would then likely subject all the owners to a legal battle they did not anticipate.
  1. Joint Tenancy can undermine your estate planning wishes. Because property held in joint tenancy automatically passes to the other joint tenant, your wishes in a Will or Trust, which might be entirely different,  will be ignored.  In other words, joint tenancy will “override” your wishes as stated in a Will or Trust.