The Liabilities Of Joint Tenancy

There are some undesirable side effects to joint tenancy. Many reputable law firms will not allow their clients to hold property in joint tenancy. Joint tenancy leaves you terribly exposed to lawsuits. If one party gets a judgment against him/her, the whole property can be liened even though the other co-tenant had nothing to do with the litigation. Even worse, the judgment holder can force a sale of the property, and lien the entire proceeds of the sale. Since the joint tenancy interests are not separable, both tenants are equally affected by the lien.

When the joint tenants are married to each other and one becomes incapacitated (legally declared incompetent) the healthy one cannot sell, borrow against, gift or exercise any rights of ownership without a probate proceeding. Permission from a judge is required until the incapacitated joint owner either recovers or dies. Often permission to act is not given. The words, "with rights of survivorship", mean that a joint owner has no separate rights with the property until the other owner dies. Another factor is that the first one to die will get exactly 50% (assuming there are only two joint owners) of the current value of the joint interest included in his/her estate, for estate tax purposes. In some cases that is OK, but not in others. For example, if one of the tenants contributed 90% to the purchase of the property, his/her estate still has to take a 50% value for estate tax purposes. The estate of the deceased only gets a step up in basis on 50%, even though the decedent may have purchased 90%. This can result in a large capital gains tax, because of a valuation that is unfairly applied (when the surviving spouse or heirs sell that property). With separately owned interests, the deceased would get a step up on 90% of the value in the same example.

Joint tenancy with children is even worse, for these reasons

• All of the above problems still apply
• Placing the asset in joint tenancy is a gift and may have gift tax consequences
• Your asset is now exposed to your children's liabilities as well as your own
• You asset is now exposed to your children's spouses in event of a divorce

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