Phase One
My wife and I ate at a restaurant last week for the first time in months. We ate outside, and everything seemed fine. However, at the outdoor bar, people were lined up elbow to elbow.
There is a great variance on what people are comfortable with as we reenter the opening of our State. Is the name of the game patience, tolerance, or caution? Yes.
People approach this, as in so many other things today, at polar opposites.
The reopening is a welcome change from our lockdown circumstances. It coincides with the protests and unrest following the George Floyd killing. Tensions are high and tempers strained to the breaking point.
Our business has remained in service throughout the stay at home order. We have changed and are continually changing our processes to keep us and our clients safe and comfortable while getting plans in place or updated or implemented. Our meetings are not face-to-face or even mask-to-mask, but rather mostly video conference.
If someone lacks the technology, we have a conference room for them to use with one of our computers to meet and review documents.
These constant adjustments are dealing with the great unknown. In many ways, this is a familiar part of our business, as we have always helped clients cope after death, which usually involves many adjustments and unexpected complications.
This month, I wanted to explain a few of those complications with a common tool many of you are relying on.
Joint Tenancy: Fact and Fiction
You have probably heard the terms “joint tenancy” or “joint tenants” before. However, you might not know what those terms mean. Although the word “tenant” makes it sound as if you are renting an apartment or house, joint tenants own a piece of property together, as opposed to renting it. The law imposes strict rules on how joint tenants can be created. If you and someone else own the house where you live, you might be joint tenants. This article will provide an overview of a rather complex subject. The proper titling of any asset requires great care to avoid potentially unpleasant and unintended consequences.
The Four Requirements
If you and another person want to hold title to an asset as joint tenants, then you must satisfy all four of the following factors:
- Unity of time. You must both take ownership of the property at the same time.
- Unity of interest. Each joint tenant must have the same amount of ownership. For example, if you and the other person own a house, you must have a one-half share and the other person must have a one-half share. If three people own the house, they must each have a one-third share. If one person has a one-half share and each of the other people have a one-fourth share, they are not joint tenants. Instead, they are tenants in common.
- Unity of possession. Each of you must have the equal right to use and possess the entire piece of property, even though you do not individually own a 100 percent share of the property. Hypothetically, assume someone converts an old mansion into four condominiums. Four different people buy the condos, with each person owning only one of the units. If you own unit A, you do not have the right to enter or use units B, C, or D. This situation is not joint tenancy.
- Unity of title. The names of all the joint tenants must be on the same legal document, the document that transferred the property to the joint tenants together. This legal document can be a deed, a last will and testament, revocable living trust, or another document that is sufficient to transfer the title to the property.
Joint Tenancy is Not Automatic
Inheritance is a common way that people become joint tenants. However, this is not automatic. Suppose a mother dies with no surviving spouse and leaves the family home to her three children Peter, Paul, and Mary under her revocable living trust (RLT). She specifically identified only these three children by name as the “specific bequest” beneficiaries of the family home under her RLT, because her intention was for them alone to inherit the home, not grandchildren or in-laws. Unfortunately, even though Peter, Paul, and Mary inherited the home at the same time through the same document, this alone does not create joint tenancy between them in most states.
Problem: Paul predeceased his mother and she was unable to revise her RLT. What happens to Paul’s interest in the home at his mother’s death? It passes to Paul’s children, not to his siblings. The default legal presumption is equal shares as a tenant in common.
What should the mother have done to ensure joint tenancy between her children? In most states, the use of “magic words” would have left no doubt. Accordingly, her RLT should have provided that the home passed to Peter, Paul, and Mary as joint tenants with rights of survivorship and not as tenants in common.
JTWROS by Design
As in the illustration above, sometimes parents leave an inheritance to their children as JTWROS to keep the inheritance from passing to irresponsible grandchildren or in-laws. In that case, what if all the children predeceased their mother? How could her RLT protect the home from passing directly to irresponsible grandchildren or in-laws? This is where further estate planning with one or more inheritance trusts can administer the home under the specific guidance provided to a trustee appointed under the RLT.
JTWROS Advantages
There are several advantages to transferring property in JTWROS. These benefits include:
- Probate Avoidance. Property held in JTWROS passes directly to the surviving joint tenant(s) without requiring probate. In fact, a death certificate is typically all that is required to transfer the interest of a deceased joint tenant.
- Efficient Ownership Continuity. It is an effective and efficient means to pass title between one or more joint tenants when ongoing ownership is intended to remain among the joint tenants until the death of the last joint tenant.
JTWROS Disadvantages
As with everything in life, there are several disadvantages to transferring property in JTWROS. Here is one of the biggest:
- Loss of Sole Ownership. Suppose in the previous hypothetical, the mother chose to deed her home to herself, along with Peter, Paul, and Mary as JTWROS while she was alive. This is not uncommon. Unfortunately, the mother no longer is the sole owner of her home, but even worse, the ownership of the home itself could be jeopardized should any one of her children experience a divorce, lawsuit, or bankruptcy. If the mother needs to sell her home to move to assisted living, then she must have the agreement to sell from all her children and, in most states from their spouses.
Do I Still Need a Will?
Yes! If you are relying on JTWROS planning to control the distribution of your assets (e.g., the law does not limit joint tenancy to real estate), be sure to create a last will and testament should you run out of surviving joint owners? Think of the last will in this context as “cheap insurance” to help make sure your assets are distributed, according to your estate planning objectives.
Upcoming Programs
Check the events tab on our website for our three available webinars: A Basic Estate Planning 101 Programs; What to Tell Your Executor, and a program on the New Secure Act and its effect on inheriting IRAs. These programs can be good information for you, your family and friends.
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Building wealth is only half the job. Protecting wealth for your loved ones and yourself is equally important. Through estate planning, business planning, and asset protection, our firm will help you protect everything you love — family, friends, and favorite charities. For more information be sure to visit our web site where you will have access to our blog, events schedule, and a complimentary newsletter subscription!
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