Joint tenancy is a simple way for two people to own an asset. If you and another person are joint tenants with a right of survivorship, you own the property together. If one of you dies, the other one owns the property.
Joint tenancies are not just used by married couples. Business associates, parents and their adult children, unmarried couples, and even friends sometimes put property into joint tenancy.
Tenancy by the entirety is similar to joint tenancy. In some states, married couples can use tenancy by the entirety instead. Before you hold property in joint tenancy with any other person, however, you should know how it works, when it's the best option, and when it can be a disaster.
Good reasons to hold property in joint tenancy
- Setting up a joint tenancy is easy. In fact, you may enter into it without much thought -- for example, when you both sign up as owners of a new car, or when you open a bank account. You don't usually need any additional documents, and it doesn't cost anything.
- Assets held in joint tenancy avoid probate. You really, really want to avoid probate -- the legal process of administering a deceased person's will (or estate if there is no will). This process includes collecting assets, paying bills and debts, and distributing anything that's left. Avoiding probate is especially important for assets the other person needs to use immediately after one of you dies. Probate can take months, or even years. The costs of putting an asset through probate can be up to 5% of your estate's value. It's a good idea to keep as many assets as possible out of probate, and putting them in a joint tenancy may be the easiest way to do that.
Reasons you might not want to hold property in joint tenancy
- Joint tenancy is irreversible without the other person's consent. By putting an asset, such as your house, into joint tenancy, you're giving away part ownership. This makes it a terrible choice for all but the most rock-solid, long-term relationships. If the relationship ends, the other person can refuse to relinquish his or her part ownership in the property. If you are still joint tenants when you die, the other joint tenant becomes the owner of the property -- your heirs get nothing.
- One joint tenant's financial problems can jeopardize the asset. Say you own a house jointly with a live-in partner, and he falls behind on his bills. His creditors may try to attach your house. Or say you add your adult daughter to your checking and savings accounts, and she files for bankruptcy. By the time you know there's a problem, it may be too late to undo the damage.
- Putting a large asset into joint tenancy with someone other than your spouse may mean you have to file a gift tax return. You almost certainly will not owe a tax when you file, unless you give away an exceptionally large amount. You have to give away a total of more than $5.34 million in property (based on 2014 numbers) before you owe gift and estate tax. If you give an interest worth more than $14,000 (in 2014) to one person, however, you may need to file a gift tax return. Any gifts you give to a spouse who is a U.S. citizen are exempt from gift tax requirements.
- When you die, the other person owns the asset. If that's not what you intended, it's a problem. For example, if you have three children, you may think you should add one child to your bank accounts so he or she can pay your bills if necessary. The other two children may not be thrilled to discover after your death that the bill-paying child now owns your accounts. If you want one of your children to pay your bills if you become ill or incapacitated, set up a power of attorney instead.
How does the surviving joint tenant take ownership?
When one person dies, the other person owns the car or other assets. To take the deceased person off the title or other papers, the survivor takes a death certificate to the motor vehicles department, bank, or county courthouse and fills out any paperwork required.