Joint Ownership, Advice from a Montana Probate Lawyer

Over the last few weeks, I have been posting a series of entries regarding methods for avoiding the probate process.  For a more general overview of probate avoidance methods, see Part I of this series; or for a discussion of beneficiary designations, see Part II of this series.  Today’s blog post focuses on joint ownership with the rights of survivorship.

Joint Ownership with the Rights of Survivorship

A method commonly used to avoid probate in Montana is joint ownership with the rights of survivorship. If you own something jointly with the rights of survivorship it means that upon the death of the first co-owner, title to the entire property or assets automatically transfers or “vests” in the surviving co-owner. Probate is not required until the death of the last surviving joint tenant, or co-owner.

Most couples own joint bank accounts or own their homes by joint tenancy (known as “tenancy by the entirety” for married couples), so it is a concept we can easily understand. Joint ownership is a good method for transferring property, especially real property, upon your death. It can be a simple and easy way to transfer your property quickly. However, joint ownership does have its disadvantages.

Disadvantages of Joint Ownership

Simultaneous Death

A major disadvantage of joint ownership as an estate planning tool is that it does not account for what happens in the event that both owners are in an accident together and die at the same time. If both joint tenants die at the same time, a Montana probate proceeding would be required for both of the joint owners. Moreover, if the owners did not have a valid will or trust, the probate court would have to decide which owner was the first to die to determine which owner’s heirs would inherit the property.

Loss of Ownership & Control

Another disadvantage is loss of ownership rights and control. I will occasionally get questions from individuals seeking to avoid probate and wanting to give joint ownership in their home to an adult child, or to otherwise add a child on to the title of their home. In this scenario, when you grant joint ownership to a child, you actually give up a portion of the ownership in that property and you lose ultimate control of the property. A joint owner has the ability to transfer or encumber his or her ownership interest in the property, which can have significant negative implications on your ownership rights. This also means that the property can be subject to creditors, or even the bankruptcy, of your child or other joint owners.

Tax Implications

There also can be some significant tax implications of simply “giving” joint ownership to an adult child, including the possibility of having to pay federal gift taxes; and the loss of “step-up” basis that is available to children that may have inherited your property. If a child inherited the property instead of receiving the property through joint tenancy, he or she would have the advantage a 100% “step up” in basis. This means that upon a subsequent sale of the property, your child can use the value of the property as of the date of your death for purposes of capital gains, instead of using the value at the time you purchased the property.  However, if the child received the property through joint tenancy, he or she would only receive a step up in basis for a portion of the property. For the portion of your property that your child received via joint tenancy, he or she would have to use the value as of the date of transfer for purposes of calculating capital gains.

For purposes of this post, I will not go into specific detail regarding all of the potential tax implications of joint ownership. However, it is important to understand the tax implications for your particular situation and discuss these issues with your tax advisor.

Joint tenancy can be an effective estate planning tool, but I always recommend you use it in conjunction with a will or revocable living trust. While it is often used to hold property with your spouse or partner, it is best to avoid joint tenancy for other family members or co-owners, especially if you have any doubts about that individual’s motivations or credibility. If you are considering transferring property to joint tenancy, I recommend that you thoroughly discuss the tax and estate planning impacts with your tax advisor and a Montana estate planning attorney to avoid any unintended consequences. If you have questions or would like to discuss joint tenancy with a Montana estate planning attorney call me at 406-752-6373.