Joint Tenancy ... Use With Extreme Caution
by Harry E. Thorsteinson

One of the most abused “tools” in estate planning is joint “tenancy” or “ownership.”  Many assets can be owned in this fashion and it is most frequently used by husbands and wives – houses, bank accounts and investments are examples.  The significance of this type of ownership is that the interest of the deceased owner flows directly to the survivor upon death.  The use of this type of ownership is appropriate within a marriage.

Problems arise, however, when people extend the use of joint ownership beyond and outside marriage.  An example would be the single person who decides to place an asset in joint ownership with a child.  The usual motivation is to avoid the costs associated with “probating” an estate and the “probate fees” themselves.  Joint ownership may accomplish these savings, but such “savings” may pale in comparison to the potential problems that are created.

The first “saving” is the Estate Administration Tax (probate fee) and it is very modest and far below what most people expect (0.5% on the first $50,000.00 of assets and 1.5% on the balance).  The other “saving” is the legal fee associated with the court application for “probate”.  This fee varies based upon the size of the estate but will likely be at least $750.00.

The pitfalls are best illustrated with the example previously mentioned – a father (widowed) transfers ownership of his home into the name of himself and one of his daughters as joint tenants.  If he dies first the house will pass directly to his daughter.  If the daughter dies first, the house reverts to him and he is back where he started.  He may live for many years and could have a “falling out” with his daughter.  If so, he could change the “joint” ownership in these circumstances but he couldn’t change the fact that the daughter now owns one-half of his home and, if he is not getting along with her, this could be very dicey.  The daughter could experience financial difficulties and her creditors may come after her share of the property.  The daughter may experience marital difficulties and her half of the property may become embroiled in her messy matrimonial problems.  There are potential problems for the daughter as well.  Since this is not her principal residence, any increase in value would be subject to capital gains!

A major problem we experience is the lack of clarity as to the intentions of the father in this example.  I recently settled a highly contested estate dispute where a father prepared a will equally dividing his assets among his two children.  He then transferred ownership of a major asset into his name and one of the children’s names as joint owner.  Upon his death, the issue became whether or not he truly wanted that one child to have that asset exclusively, or was the child a “trustee”, and expected to treat the asset as an estate asset and share it equally with the other child.  Good question – there are unfair results either way.  It is not fair that the asset be divided if the father wanted the one child to have it; but equally unfair not to share it if that was his intention.  This situation is common and rarely do we find any evidence related to the intention of the person in the father’s position.  The situation pits one family member against another and leads to very costly and painful estate disputes.

The lesson to be learned here is that, if you insist on using joint tenancy as a tool, you should leave instructions with your estate papers clearly stating your intentions.  Better still, think twice before you use this estate planning device.  The financial savings are usually not worth the potential pitfalls.  Finally, do not transfer any assets into joint ownership without discussing this with your lawyer and ensuring that this tool is appropriate and fits into your overall estate plan.