To avoid probate, people sometimes put loved ones’ names on property or bank accounts as “joint tenants.” When one joint tenant dies, his or her share automatically passes to the other joint tenants. Joint tenancy does avoid probate. However, there are several things that you should think about before using a joint tenancy. Joint tenancy increases your property’s exposure to creditors, lessens your control over your property, can have unexpected tax consequences, and does not protect your home from Medicaid liens. Also, if both joint tenants die together, then there could be two probates.
If you put another person’s name on property or a bank account as a joint tenant, then that person’s creditors can come after the property. Let me share the experience of one of my clients. She had a joint bank account with her daughter. One day, she received the bank statement in the mail and looked at it. Thousands of dollars had been taken out of her account! She called the bank and talked to several people before she finally understood what happened. Her daughter had gotten divorced. The daughter’s ex-husband was supposed to pay the car loan. He stopped paying. His wife was still legally liable for the loan. The car loan was at the same bank where mother had the joint account with daughter. The bank saw that there was money in the account with daughter’s name on it, so they took out of that account thousands of dollars to pay off the car loan that her ex-husband was supposed to pay! That is just one of the risks you face whenever you have a joint tenant.
Joint tenancy also lessens your control over your property. If you own property with only you on the title, then you can make all the decisions for that property. You can sell it and keep all the money. You can put a mortgage on the property. However, when you add someone else to the property as a joint tenant, then you need that person’s permission to sell it or put a mortgage on it, and if the property is sold then that other person gets half of the money. Also, the other joint tenant can give his half away, or sell it. The other joint tenant can force a sale of the property and take half the money. You can’t take the other joint tenant’s name off the property without his permission. The risks are greater when you add more than one joint tenant.
Joint tenancy can also have unintended tax consequences if you have enough assets to be taxed by the estate tax. If you paid for the property, then add someone else as a joint tenant, when you die, the value of 100% of the property is counted for estate tax purposes, even though you only own half of the property. Also, once you add someone else on the property as a joint tenant, you have given her a gift. If the value of the gift exceeds the annual exclusion amount, currently $13,000, then you should file a gift tax return with the IRS.
Joint tenancy does not protect your home from Medicaid liens. If you go to a nursing home and qualify for Medicaid, the government can still put a lien on your half of the property. A lien is like a mortgage. It means that someday the government will collect from your half of the property all the money they pay for your nursing home costs.
The exposure to creditors, loss of control, unintended tax consequences and loss to nursing home costs can be avoided by using other methods. A revocable living trust avoids probate, limits the property’s exposure to only your creditors, keeps control over the property in your hands, but does not protect property from Medicaid liens. It is wise to consult a knowledgeable estate planning attorney before deciding on the best way to protect your assets.