Why Joint Tenancy is a Bad Idea

If you own a house with your spouse, you probably own it as joint tenants or as tenants by the entirety (a form of joint tenancy that is only allowed between spouses). You can own any kind of property as joint tenants with anyone else – real estate, stocks, bonds, cars, or bank accounts. It’s easy to transfer property owned as joint tenants when one of the joint owners dies - you don’t need to go to court and you don’t need a will. The surviving owners automatically own the dead person’s share.

So why can joint tenancy be a bad idea? Suppose you and your siblings own the family summer cabin as joint owners and you die. Your share does not go to your spouse and children, it goes to your siblings.

Suppose you own a bank account with your child to make it easy for him to write out the checks for your bills. But he can write out a check for everything that is in the account and pay off his gambling debts. And you can’t stop him from writing that check. After all, he’s one of the owners of that account, even though he didn’t contribute a penny to it. Additionally, the tax code says that when you put you son’s name on that account, and he didn’t contribute to that account, you gave him a gift of one-half of that account. Depending on the size of that bank account, you gave him a large enough gift to be required to pay gift tax.

Many parents put their children’s name on the deed as joint tenants when the parents get older. They believe that this will make it easier for their children to inherit the house. But it creates problems during your lifetime that you never thought about. Suppose you want to sell the house and move into an assisted-living apartment. But your children don’t want to sign the deed. Without their signatures (because they are owners too), you can’t sell. You can’t get a home equity loan without their signatures on the loan documents. They have the right to live in the house even if you don’t want them living there. And if one of your children’s spouses is divorcing your child, that spouse can have a claim against your house (because the spouse that he/she is divorcing is one of the owners of your house).

Another problem that a parent does not consider is when a parent puts a child’s name on the parent’s property and the child loses a lawsuit and has a judgment filed against him. One of his assets is your property that you hold in joint tenancy with him. Now that creditor can own your property in satisfaction of the judgment against your child.

Another common situation is when one of the joint owners becomes mentally or physically disabled and cannot sign documents. If the incapacitated person has not appointed an attorney-in-fact using a durable power of attorney, you cannot sell, mortgage, or gift your property until you go to court to get a conservator appointed for the other joint owner. This is expensive and time consuming.

While placing property into joint tenancy is a common estate planning technique, it is often a very bad idea. There may be unintended tax consequences, loss of control and/or liability risks. Other methods exist to plan an estate, whether the estate is large or small. Call an estate planning lawyer to discuss the better estate planning tools.