Marsha knew she wanted to leave her house to her only son. She didn’t want anything too complicated. Then she had what seemed like a good idea: If she put a property in joint tenancy with her son, perhaps both of them might be able to avoid issues with probate later on.
Life was smooth for a while, but as the years went by, the relationship between Marsha and her son deteriorated. Now she wants to sever the joint tenancy, but finds that it is harder to do than she expected.
What is Joint Tenancy?
Joint tenancy is a form of co-ownership where multiple people own an undivided share of an asset and its attendant responsibilities. Each person has the right to use it. The last person left alive becomes the owner of the asset.
In this example, when Marsha passes away, her son will own the property outright. If her son passes first, Marsha will own the property outright. There will be no probate proceeding at that time. The ease of transfer to the surviving tenant usually is viewed as a positive benefit.
Things in life can change, however, whether due to family dynamics, financial considerations, business pressures, or something unexpected. Suddenly, the joint tenancy potentially can become an impediment. For example, if one party wants to sell the property and another wants to keep it, the joint tenants need to reach an agreement over what to do. Disagreement among joint owners can lead to disputes, soured relations, and even litigation to partition – or divide up – the ownership interests. Similarly, one cannot readily change or reverse the joint tenancy without agreement.
Another problem is that most joint tenancies do not provide protection against creditors of one of the joint tenants. (There is an exception for a marital residence held in a type of joint tenancy called tenancy by the entirety) If one of the joint owners has debts, at least some of the jointly-held assets may be utilized to satisfy those debts.
Fortunately, there are other alternatives to joint tenancy. Marsha, for example, had other options to make sure that her son received the property without the need for probate after she passed away, while preserving her rights to potentially modify or to sell the property if necessary.
She could have set up an appropriate kind of trust. In the case of real estate, she could also set up a land trust, or she could have recorded a transfer on death instrument. Each of these options would have avoided the need for probate of the real estate, and, if set up appropriately, would have had mechanisms to allow her to make changes during her lifetime. The respective benefits of these options is outside the scope of this post – but is within the scope of estate planning.
If you’re considering a joint tenancy for real estate or other investments, talk to us first. Setting up the right plan can minimize the risks and unintended consequences that can impact you in years to come. Call us today at 312-278-1187 to schedule a strategy session.