Jointly Owned Property – Brief Summary

Joint tenancy refers to property owned jointly with rights of survivorship. If one tenant (owner) dies, the other tenant automatically becomes 100% owner of the property.

A variety of estate, gift, and income tax considerations are involved in relation to joint tenancy. Under current law, only one-half of the value of property held with a spouse in joint ownership with a right of survivorship will be included in the gross estate of the first to die. This is regardless of contributions of either spouse as to the acquisition of the property or its improvement if the spouses are the only joint tenants.

Incidental Side Effects

The one-half interest includible in the gross estate of the first spouse to die and passing to the survivor gets a step-up in basis; it is equal to the fair market value of the property at the date of death (or six months later if the alternate valuation date is elected.) The survivor carries over the pre-death basis of the other one-half interest. The one-half interest passing to the survivor qualifies for the marital deduction.

Current thinking calls for placing the maximum amount into a Non-Marital Trust in order to reduce the size of the second estate. This would save taxes and probate expenses. Families may wish to use a formula provision to maximize the funding of the Non-Marital Trust in order to use the full-unified credit without incurring current federal estate tax.

In larger estates it is sometimes preferable to place more assets into the Non-Marital Trust and incur some taxes now at a lower rate than would be due in the second estate. It is advisable for the executor to have the authority to place into this trust those assets for which the greatest appreciation can be reasonably expected.

On the death of the survivor, the property acquired from the deceased spouse, except for what he or she may have consumed or disposed of, will be included in the survivor’s gross estate.

Advantages of Joint Ownership

Though there are some factors weighing against the use of joint tenancy, they may be offset in some circumstances by the following considerations:

• Joint ownership avoids probate and the publicity, delays, and costs of probate.
• Joint ownership may have some psychological or emotional benefits in terms of cementing the marital relationship.
• Joint ownership may serve to insulate the property from the claims of creditors or liability claimants.
• Joint ownership offers a degree of convenience and ready access to assets. This may be especially suited to certain types of property such as principal residence and checking or savings accounts.

Therefore, joint titling of property should be evaluated separately for each state to minimize taxes and expenses.

Summary

Joint ownership between spouses eliminates a descendant’s ability to transfer property by will to a trust that might protect the surviving spouse from investment responsibilities, from unwanted pressure from children or a second spouse, or from the general financial management of the assets.

Even thought joint tenancy may satisfactorily provide for the survivor, this arrangement does nothing to ensure the protection of children and other descendants upon the death of the surviving spouse. Joint tenancy should never be thought of as a will substitute. In addition to the fact that it is completely unsatisfactory in meeting the estate planning needs at death of the second spouse, joint ownership does not accomplish any of the important functions of a will, such as naming an executor and granting the executor power to act, or providing guardians for minor children.

The general rule is that joint tenancies often frustrate a client’s ability to properly provide for the entire family at the time of death and at the death of the surviving joint tenant.