A joint tenancy with right of survivorship can be created in real estate by a deed to “A and B”, husband and
wife, as joint tenants and not as tenants in common with full rights of survivorship, the whole estate to vest in
the survivor in the event of the death of either” or at a bank by opening a joint account “A or B.” On the first death of a joint tenant all of the assets will belong to the survivor without the need for probate. The surviving joint tenant is responsible for filing an estate tax return and has personal liability to pay those taxes, if any.
Unfortunately, many people are unaware of the other draw backs that can cause problems. Here are some joint tenancy problems that I have seen occur in my law practice
NUMBER ONE: PROBATE IS AVOIDED ONLY UPON THE DEATH OF THE FIRST TENANT
The probate avoidance advantage of holding assets in joint tenancy applies only on the death of the first joint
tenant. If the second joint tenant’s death occurs closely in time or if the second joint tenant becomes incapacitate,
a probate or guardianship will be required. This is a common problem with older couples.
NUMBER TWO: REMOVING A CHILD’S NAME
Sometimes an event occurs which persuades the parent to want to remove the child’s name. The child has a right to keep their name on stock, real estate, and bonds (except U.S.). The parent, as owner of a bank account, street name brokerage account or an U.S. Savings bond can remove the child’s name.
NUMBER THREE: UNAUTHORIZED WITHDRAWALS
Remember, a child who is a joint tenant has the legal right to withdraw all of the funds from a bank account, cash in U.S. Savings Bonds or investments in a stock brokerage street account. Sometimes the son-in-law or daughter-in-law can persuade your child to borrow the money, intending to pay it back someday.
NUMBER FOUR: DIVORCE
Assets held in joint tenancy with a child may become subject to your child’s divorcing spouse’s claim for equitable division or alimony in the divorce action.
NUMBER FIVE: BANKRUPTCY
If a child who is a joint tenant declares bankruptcy, ½ of the asset held in joint tenancy may be lost to bankruptcy or tied up in the bankruptcy.
NUMBER SIX: CREDITORS AND IRS LIENS
Assets held in joint tenancy with another person can be seized by creditors and a lien can be filed against real estate.
NUMBER SEVEN: FEDERAL GIFT TAX
Creating a joint tenancy may constitute a gift. You may be required to file a Federal Gift Tax Return.
NUMBER EIGHT: ESTATE TAX
Joint tenancy ownership between a husband an wife results in all of the property being included in the survivor’s estate. If your estate is large enough to be subject to estate tax, you probably should not use joint tenancy ownership.
NUMBER NINE: CONFLICTS WITH TAX CLAUSE
Sometimes wills or revocable trusts contain a tax clause directing that all taxes be paid from the residue of the estate. If the assets are primarily held as joint accounts, then all of the taxes owing because of the property held in joint accounts will still have to be paid from the residuary. This may be not be fair. This is a frequent problem in second marriages where one spouse will name certain children beneficiaries on an annuity, IRA, or joint account only to find that the tax clause in the will or trust requires the other step-children to pay the taxes, if any are owing. If your estate is exempt from estate tax, in Oklahoma less than $3,000,000 and $3,500,000,000 for Federal, then this would not be a concern. But keep in mind that assets left outside of your trust or will by joint ownership or by beneficiary designations, will not be available to your executor to pay your final bills and creditors, etc.
NUMBER TEN: INCAPACITY OF JOINT TENANT
This is a very troublesome issue. When one of the joint tenants becomes incapacitated, the remaining joint tenant only has the legal right to use for themselves their 1\2. The 1/2 of the incompetent joint tenant must only be used for the incompetent joint tenant’s benefit. For example, assume a second marriage husband and wife, with each having children from prior marriages. The husband becomes incompetent. Everything is joint tenancy. The wife cannot lawfully withdraw all of the joint tenancy money from the bank accounts or investment accounts and open a new account leaving it all to her children at her death. She could lawfully do this for her 1/2. The husband’s 1/2 is subject to a constructive trust to be used only for his benefit and to remain in joint tenancy, short of a division by the Court.