Joint Tenancy: Benefits and Pitfalls

Joint tenancy is an arrangement that allows beneficiaries to access your account without having to go to court. Couples and business partners can take title to each other’s bank accounts, brokerage accounts, real estate, and personal property as joint tenants with rights of survivorship (JTWROS).

Joint Tenancy With Survivorship

Joint tenancy with rights of survivorship (JTWROS) is a type of account that is owned by at least two people. In this arrangement, tenants have an equal right to the account’s assets. They are also afforded survivorship rights in the event of the death of another account holder.

In simple terms, it means that when one partner or spouse dies, the other receives all of the money or property. That is why many married couples and business partners choose this option. However, there are some things you should consider before entering joint tenancy. Below, we’ll take a look at the advantages and disadvantages of this arrangement.

Avoid Probate With JTWROS

When a person dies, a probate court reviews his or her will. The court’s purpose is to decide whether the will is valid and legally binding. The probate court also determines what liabilities and assets the deceased may have. After a thorough review, the court distributes any remaining assets to heirs.

If an individual dies without a will, the process becomes more complicated. Without a will, the probate court does not have any written evidence of how the deceased would like the assets distributed.

The downside to the probate process is that it can take a substantial amount of time to sort through the estate. That means it will take even longer for beneficiaries to receive their inheritance.

JTWROS automatically transfers ownership to a spouse or business partner upon the death of the first partner, so it avoids probate. That is an enormous advantage for those who need the funds immediately.

Equal Responsibility

When a married couple or business partners own an asset that is titled JTWROS, it means all individuals are responsible for that asset. In other words, they all enjoy the positive attributes and share in the liabilities equally. That also means no partners can incur debts on the asset without also indebting themselves.

For example, a husband planning to divorce his wife cannot obtain a loan against the couple’s home and leave the debt with his wife. The moment the husband takes out the loan, he is equally responsible for its repayment. Similarly, the husband may not lease a portion of the property without sharing the proceeds with his wife.

Continuity of Joint Tenancy

When someone dies, his or her assets are often frozen until the probate court decides essential issues. The court must determine whether the assets are encumbered. Then, they figure out how to distribute the remaining assets to heirs. This process can be a problem for a surviving spouse who has outstanding debts or large fixed expenses.

However, by owning an asset as a joint tenant, the surviving spouse or business partner may use the property in any fashion he or she sees fit. The joint tenant may hold it, sell it, or mortgage it. In fact, the law states that immediately upon the death of one tenant, ownership is transferred to the survivor. Joint tenancy is particularly useful for passing on a family business without disruption when the intended heirs are partners.

Relationship Problems With JTWROS

Having two people own the entire asset is a disadvantage in an unstable relationship, regardless of whether the relationship is personal or professional. If a couple is having marital problems or business partners disagree, no party can sell or encumber the asset without the consent of all parties. This restriction is intended to prevent abuses. However, the need to get agreement from all parties can make it difficult to take necessary actions.

Frozen Bank Accounts

The probate court may also freeze the account of joint tenants in some situations. For example, the court might freeze an account if the deceased is deeply in debt. Action is more likely if there is a risk that a surviving partner might liquidate the account to avoid paying the obligations.

An account can also be frozen if there is a dispute over whether a surviving spouse or business partner actually contributed to it. As a general rule, acting in good faith reduces the probability that an account will be frozen.

Losing Control of Assets

Another potential pitfall of joint tenancy is the loss of control over the final distribution of assets. When surviving partners assume control over the joint asset, they can sell it or bequeath it to someone else. In other words, the deceased does not decide on the ultimate disposition of the asset after death.

Tenancy in Common: An Alternative to Joint Tenancy

The main alternative to joint tenancy is a tenancy in common. Some of the benefits of tenancy in common are:

The Asset Is Divvied Up

Each owner is assigned fractional ownership, which may or may not be an equal portion. Also, each party can legally sell his or her share without another party’s approval or consent.

The Asset Will Pass to Heirs

Unlike with JTWROS, ownership of the asset will not automatically transfer to the surviving account owner upon the first owner’s death. In fact, the asset will pass according to provisions made in the will of the deceased. Typically, most tenants leave the asset to their heirs. However, it could still pass to the other account owner if there is such a provision in the will.

Assets Can Be Accessed

If one owner becomes disabled or dies, the other owner should still be able to access his or her share of the assets. That means he or she can sell a portion of the asset without waiting for a probate court decision.

The Bottom Line

Both JTWROS and tenancy in common have attractive features. Individuals should evaluate their situations to determine which option is more favorable before setting up either arrangement.