As a Trust & Estate Attorney in the SF East Bay, I strongly encourage friends, family, and clients to set up an Estate Plan - a trust in particular. Let there be no confusion - I do not recommend this because I believe attorneys should make money. Trust and Estate attorneys are largely in business because so many people fail to do proper Estate Planning. The consequences of failing to create an Estate Plan and using alternatives, such as Joint Tenancy - can lose one a substantial sum of money - to both lawyers and taxes. Let's focus on the downsides of Joint Tenancy in California, more accurately called Joint Tenancy with Rights of Survivorship.
Many people end up in Joint Tenancy because it seems like a simple and efficient way to ensure that someone you trust has access to your assets should anything happen to you. Most have also heard that it avoids probate - the costly process of distributing one's estate when they die. While Joint Tenancy avoids probate when one party passes, placing the asset in a Trust is a much safer choice, and will avoid probate when the second party passes as well. Alternatively, one could sign a "TOD," or Transfer on Death Certificate for the asset. As of January, 2016 the Revocable Transfer on Death Deed for real property will go in to effect for California. This method also has potential complications - read my blog to find out why. Before we get into the pitfalls of Joint Tenancy, let's get a clear picture of exactly what Joint tenancy is.
What is Joint Tenancy with Rights of Survivorship?
An asset (such as a house) held in joint tenancy means that the asset is held jointly by two or more people. While the asset is in Joint Tenancy, it cannot be sold, transferred, mortgaged, or gifted without the approval of all joint tenants, or court order. The asset is also exposed to all creditors of each joint tenant.
Disadvantages of Holding a Property in Joint Tenancy
Disadvantages of Joint Tenancy in California for Husband and Wife
If a husband and wife hold a property in joint tenancy, there can be significant tax disadvantage if the property would otherwise be considered appreciated community property. When the first spouse passes away, appreciated community property receives a step-up in income tax basis on both halves of the property/asset equal to the fair market value of the property at the date of death. In contrast, only one half of the property or asset held in joint tenancy will be entitled to a step up in income tax basis when the first joint tenant passes away. A step-up in basis essentially minimizes capital gains tax for the inheritor or beneficiaries of an asset. This is often most relevant for homes, particularly those in towns such as Walnut Creek, Pleasant Hill, Danville, San Ramon, and surrounding areas of the SF East Bay, which have greatly increased in value during the past several decades.
The basic lesson here is that holding assets in community property form can mean substantial income tax savings for the estate and its beneficiaries.
2. POTENTIAL LITIGATION
Property held in joint tenancy passes to the surviving joint tenant only. No one else has a right to the property. This may not have been the intent of the joint tenant who happened to pass away first. For example, the deceased joint tenant created a will prior to buying a house with his new wife. The will stated his property should be divided equally among his children. While he intended to amend his will, he never did, and now the house is fully owned by his new wife, and the children are not entitled to any part of it. The children, believing it was not their father's intention to leave the entirety of the house to his new wife, hire estate litigation attorneys, and spend thousands of dollars litigating the matter.
Risks of Joint Tenancy for Parent and Child in the SF Bay Area
Financial problems such as a divorce will also become your problem is your child is joint tenants with you. In the midst of a divorce preceding, the child's spouse may try to claim that half of your home (or other jointly held asset) be counted toward assets to be split in the divorce settlement. Although the spouse of the child may eventually lose this argument, considerable time and money can be spent litigating the matter. And, should you wish to sell the house before the divorce is final, you would find yourself unable to.
2. CREDITORS OR ACCIDENTS
If the child who shares tenancy with you should get into an accident, and does not have adequate insurance to cover the damages, a lien can be placed against their half of the house. Similarly, if your child goes into debt and is unable to pay off large creditors such as a bank or the IRS, the creditor can place a lien against their half of the house. This could force you to sell your house in order to pay off the child's debts. Forced sales of homes and other real property can also create further expenses and tax issues. It goes without saying that should your child declare bankruptcy, similar problems will ensue.
3. SELLING OR REFINANCING
If your child is a joint tenant on a valuable piece of real property such as a home, their permission is needed to sell or refinance a home. If there is any disagreement regarding the sale of a home, you cannot sell the home. As a Trust and Estate Attorney in the SF East Bay, I have seen this problem occur when a child is very attached to a home, either because they grew up there, they are hoping to keep it in the family, or a host of other reasons.
If you wish to refinance your home, you will not be able to do so if the child does not agree, or their credit score is not sufficient enough to obtain a loan.
4. POTENTIAL LITIGATION WHEN YOU DIE
Let's look at an example of a scenario Estate litigation attorneys see all too frequently in the San Francisco Bay Area. In this particular story, the mother had a jointly held bank account with one of her three children. The mother wrote in her will that she wished for all assets to be split evenly among her children. However, when she died, the bank account (which contained the majority of her assets) was still jointly held with only one of her children. The money immediately went to that child, avoiding the probate process altogether. This is because joint tenancy (or in this case an account listing the daughter as a co-owner) supersedes estate planning documents like a will or trust. If the child who has inherited the funds by default does not wish to work with their siblings to resolve the matter, hiring estate litigation attorneys is their only option.
Why a Trust is Superior to Joint Tenancy
Placing your assets in a trust solves the problem of probate, and eliminates the risks of joint tenancy. For residents with valuable homes in Walnut Creek, Danville, Lafayette, San Ramon, and surrounding areas of the East Bay, the cost of setting up a trust is minimal when compared to the financial risks of joint tenancy.
For questions about setting up a Trust, Call Elder Law and Estate Attorney Matthew Talbot at 925-322-1763 for a free consultation.