Many people have the false conception that they will be able to protect their assets if they co-own property. Some of the common ownership types include joint tenancy, tenants in common and tenancy by the entirety. While these can offer some benefits, these methods of ownership will not offer solid asset protection; and actually may make it worse.
Why Joint Tenancy to Avoid Probate and Taxes is Not the Best Asset Protection Plan
Many people think of joint tenancy as a form of asset protection. Families will use a joint tenancy to avoid probate and avoid taxes of their property and real estate. They also will use it to distribute the real estate to their beneficiaries equitably. This form of asset protection may not be wise.
Asset protection is an important part of estate planning, but there could be some problems with the ways to own property if you listen to the wrong “expert.” There are a large number of estate planning attorneys that will recommend common ways to title property to incorrectly do asset protection. The problem is that many of these ways can be a disaster when looking at them from the view point of Asset Protection. There are a few ways that clients will typically own property.
Pros and Advantages of Joint Tenancy
Joint Tenancy This is also referred to as joint tenancy with the rights of survivorship. Owning property as a joint tenancy will allow each joint tenant the same rights, which can include:
1. Right of joint tenant to use property
The right of the joint tenant to use the property, including with land, the right to occupy the entire property, with bank account money or stocks and the right to spend the entire amount.
2. Joint tenant can transfer ownership of property
The right to make a transfer of the interest that is in the property without having to receive permission from other co-owners.
3. Right of Survivorship in joint tenancy
A survival right, for example, when a tenant dies. This means that the share of the tenant that has passed will automatically become an asset of the other co-owners. Basically, this states that a joint tenant cannot transfer the interest at death.
Avoiding probate with the joint tenancy
The question is why joint tenancy is even used. It happens to be one of the most common forms of ownership for a large variety of assets, including real estate, brokerage accounts and bank accounts. The reason this is a common form of ownership is because when one owner dies, the entire asset will then become the asset of the other owner. The end result is that this is one of the best ways to avoid probate for a particular asset. The following will address why these may not be good in regards to asset protection.
Cons and Drawbacks of Joint Tenancy
While joint tenancy may sound great at first glance, there are some reasons why it is not the best choice in regards to asset protection, such as:
1. Joint tenancy can be served
Joint tenancy can be served. This means that is one of the tenants transfers or sells the interest in the property, the joint tenancy will then become a tenancy in common.
2. Joint tenancy can be subject to creditors
The joint tenancy is an asset of each individual co-owner and can be subject to creditors. If either owner were to be sued and lost the court case, the creditor could receive the interest in the entire property. This will destroy the joint tenancy and could also result in the entire property being sold in order to satisfy the debt.
Case Scenario of a Joint Tenancy
Example: Let’s say that Doctor Johnson owns some property that has a worth of $1 million and he owns it as joint tenants with a sibling. The doctor is then sued for malpractice and the final judgment against him totals $3 million. He only has $1 million in malpractice insurance. The creditor can then proceed in asking the court to force the sale of the property that is owned with the doctor’s sibling. The creditor could also ask that the interest in the property be transferred directly to the creditor. Either of these transactions will have consequences. Basically, the bottom line is that any asset that is owned by joint tenancy will be subject to creditors of multiple people.
3. Whoever lives the longest wins in a joint tenancy
Joint tenancy is nothing more than a gamble. Basically, whichever co-owner lives the longest will end up with all of the assets. Generally, this is not the intent when the joint tenancy is established. In fact, many people who have this type of ownership do not even realize the potential problems that could arise. This is often the case when parents are trying to avoid probate and taxes on property and have the desire to give an equal share of the property to any children.
Read more on joint tenancy as asset protection.
Based on these possible problems, it is suggested to avoid joint tenancy as a means of asset protection.
Read Part 2 Tenants in Common, Tenancy by Entirety
Read more on Joint Tenancy: Community Property