Asset Protection

Joint Tenancy

Learn here what joint tenancy is and how it works, as well as whether it is a good means of protecting assets or not.

Simply stated, joint tenancy is a means by which an asset (owned by 2 or more people) can automatically be transferred to the survivors of the owners listed when any one of them passes away. There are provisions for groups, such as a husband and wife, rather than considering them as individuals. In this case, the funds can’t be transferred until both (or all) of those parties pass away. Most of the time, however, there is an automatic transfer when only one party passes away.

Joint tenancy is one way to protect assets, but there are very real concerns when holding real estate and investments in joint tenancy with your children. Holding an asset with anyone can be problematic and can even be horrific when it is your home.

Many well-intentioned elderly parents in an attempt to avoid probate and protect their assets, add their children to the title of their home as joint tenants. Many times the transfer probably occurs without a hitch.

But, there can be problems. The children, even one of them, can have creditor problems. If this is the case, those creditors can go after the home of the parents even when they have not yet died and may even still live there. This is quite a big risk for someone to take, especially if it is the only real asset they have.

The other problematic issue concerns income tax. This means that, if a parent obtains joint tenancy with two children on the deed of the home and the home is worth $200k at the time, the children each receive a $50k gift immediately. Then, if the parents die 20 or 30 years later and the house has doubled in value, the kids may want to sell. They then sell the house and split the $400k. This means that each child will owe income taxes on $150k. (They each only had $50k originally, which leaves a $300k profit. Split this down the middle and they each made $150k.) If, instead of joint tenancy, they had simply inherited the whole property when it was worth $400k and sold it they don’t have to pay any income tax on that sale.

So, joint tenancy is one method of protecting assets, but it is not the way to go in every situation.