Estate planners generally tout the virtues of owning property jointly — and with good reason. Joint ownership offers several advantages for surviving family members. But this shouldn’t be viewed as a panacea for every estate planning concern. You must also be aware of all the implications.
2 types of joint ownership
As the name implies, joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.
From a legal standpoint, there are two main options for married couples:
Property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. Generally this would apply to co-owners who aren’t married to each other, though in certain situations married couples may opt to be tenants in common.
The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as being intrusive. Jointly owned property, however, simply passes to the surviving owner.
Joint ownership is a convenient and inexpensive way to establish ownership rights. But the long-standing legal concept has its drawbacks, too. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. Comparable rules may also apply on the state level.
For starters, if parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed his or her own property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person actually makes a withdrawal.
For smaller gifts, the gift tax liability may be covered by the annual gift tax exclusion ($15,000 per recipient in 2020). If the gift exceeds the exclusion amount, it can be sheltered from gift tax by the gift and estate tax exemption ($11.58 million in 2020). However, doing so will erode the remaining estate tax shelter.
Note that property that avoids probate may still be included in your taxable estate. To avoid both probate and estate tax, you must relinquish all interests in the property — including ownership and control over assets and benefits. Joint ownership doesn’t meet these requirements.
Also, be aware of possible income tax repercussions. For estate tax purposes, if spouses own property as JTWROS and one spouse passes away, the value of the deceased’s half of the property is “stepped up” to the fair market value on the date of death. There is no step up on the other half at that time. Contrast that to the result if the property had been owned 100% by the deceased spouse, in which case it could be eligible for a step up to the full fair market value at that time.
When property is owned jointly with someone other than a spouse, the entire property is included in the estate of the first to die, unless the other owner can show that he or she contributed enough to acquire a share of the property. This can have adverse estate tax consequences.
Finally, consider that a survivor of jointly owned property maintains complete ownership rights. Therefore, property could end up outside the family due to a second marriage. For example, the children of a second spouse might subsequently inherit the property. Such a scenario may defeat the intentions of the original owners.
Lessons to be learned
Joint ownership is a valuable estate planning tool, especially because it avoids probate, but it’s not the solution for all problems. Nor should this technique be considered a replacement for a will. Consult your estate planning advisor to coordinate joint ownership with other aspects of your estate plan.