The Perils of Joint Tenancy
One day Dad and Mom hear about this great idea called “joint tenancy” and put their sons Moe, Larry, and Curly on title to their house. Joint tenancy appeals to Mom and Dad because it provides a way for title to the house to pass more or less automatically to the next generation without the headaches of probate. It’s cheap. It’s easy. What’s the worst that could happen?
All goes well for about 20 years, but then one day Moe announces, “My wife is leaving me and she says she is going to take me for everything I’ve got, including my 20% of your house. She can’t touch that, can she?” Not to be outdone, Larry chimes in with, “Remember that car crash I was in three years ago after my insurance had lapsed? Well, the people in the other car got a judgment against me and their lawyer is asking questions about what I own. I don’t have to tell them that I own a fifth of your house, do I?”
To make a long story short, if Dad and Mom are not able to buy off Moe’s ex-wife and Larry’s judgment creditors, then their house could get sold out from under them. They would get 40% of the net proceeds, but that probably would not be enough to replace their home with a comparable place to live. A “cheap” and “easy” estate planning strategy ends up being neither. If Dad and Mom had invested a little money in having a comprehensive estate plan prepared, they could have held on to their house during their lifetimes and given Moe and Larry their shares of the house in trusts that would protect the house from the boys’ ex-spouses and creditors.
Even if Dad and Mom were to dodge the bullet with Moe’s ex-wife and Larry’s creditors, another way joint tenancy could bite them in the behind is by losing the opportunity to provide some adult supervision for Curly’s share of the inheritance. If Curly is characterized by bad judgment, bad habits, and hanging out with bad people, Dad and Mom would be foolish to give Curly anything. What they might want to do instead is have Curly’s share of the house held in trust for Curly’s benefit. Dad and Mom could place a range of restrictions on when distributions could be made to Curly, from proving to the trustee that he is gainfully employed, to passing a drug test.
While joint tenancy is not necessarily to be avoided at all times and at all costs, it is very important to understand its ramifications. He (or she) who puts other people on title to assets for probate avoidance/estate planning purposes may be making a huge mistake. Joint tenancy costs very little at the front end, but it exposes your back end to some very unpleasant possibilities.
Scott Makuakane, Attorney at Law, CFP
Founding Partner, Est8Planning Counsel LLLC
Honolulu, Hawaii 96813