Joint Ownership: A Good Way to Avoid Probate? (Part 1 of 2)
This question often has an easy answer: Joint ownership is (often) . . . bad! In many instances, the drawbacks, or negatives, to joint ownership outweigh the perceived benefits (other than as between a married couple). Let's take a moment to explore the potential pros and cons of joint ownership of property and why joint ownership often is a bad way to avoid probate.The DIY Neighbor
You might have a neighbor who told you that they added their adult child to their deed. "This prevents probate," they claim. "Hey, I didn't even need an estate planning attorney; you don't, either!" These days, it's quite common to hear friends and family praise how easy it is to add a child, grandchild, or other third party to their deed or bank accounts. However, this tactic of DIY joint ownership (often to "avoid probate," considered in a vacuum), can result in grave, preventable consequences. But what is joint ownership, anyway?Joint Ownership
One can hold title to (that is, "own") property (bank accounts, real estate, etc.) in various ways, but one key aspect to property ownership is that one can own an interest in property (1) in their own name alone or (2) with others (who may be other individuals, related or unrelated, or even entities like an LLC, or a trust). This "with others" idea can be a complicated concept, as "with others" (a term I am using for this article) can have different meanings. To cut to the point, if you own property "with others," it will often be either as a tenant in common (a tenancy in common, which we can refer to as (2)(a)) or as a joint owner (joint ownership, which we'll call (2)(b))."However, this tactic of DIY joint ownership (often to "avoid probate," considered in a vacuum), can result in grave, preventable consequences."
While the differences between a tenancy in common and a joint tenancy (both being forms of joint ownership) are left for another article, here, we can note that, unlike a tenancy in common, to create a joint tenancy in real property, when the joint tenancy is created, four "unities" of title must be present: (1) time; (2) title; (3) interest; and (4) possession. With joint tenancy, each joint tenant's ownership interest must be equal to the others. Upon the death of a joint owner in a joint tenancy, the deceased joint tenant's ownership interest passes by operation of law to the remaining joint tenants (unlike a tenancy in common).The following are examples of joint ownership in California:Tenancy in CommonJoint TenancyCommunity Property
It is important to note that the joint ownership term joint tenancy is used in the context of real estate. While two individuals named as owners of a bank account are joint owners, they are not joint tenants. It is also critical to remember that, with real property, to create a joint tenancy form of joint ownership in a deeded interest, the term "joint tenants" must be used; without the express use of the term "joint tenants" on the deed, the form of joint ownership will default to a tenancy in common, resulting in one or more of the potential, undesirable consequences below occurring (which can be discussed in a later article).Potential Drawbacks to Joint Ownership
Yes, on the one hand, unlike a tenancy in common, as explained above, joint ownership can avoid probate when the first joint owner dies; the more or less "automatic" effect (that is, operation of law) is that the bank account, real property, etc. passes to the remaining joint owner(s). Perhaps a death certificate will need to be presented to the bank or recorded with the county recorder, as appropriate. There are numerous potential downsides to this result, though.First, the original owner(s) creating the joint ownership is assuming that the other joint owner will not transfer his or her interest to another. As between two joint tenants on a real property deed, if one transfers their respective interest, their joint tenancy is terminated and a tenancy in common is created (raising the prospect of probate upon the death of the new tenant in common). Sharing ownership of real property with an individual you do not know is an uncomfortable prospect, but is always possible in either a tenancy in common or a joint tenancy. The point is that, with a joint tenancy in real estate, do not assume that the other joint tenant(s) will not transfer their respective interests and thereby undo your DIY estate plan and force you to associate with a new owner whom you may dislike (think of this as a "real estate divorce"!).Second, whether the property at issue is a bank account or real property, joint ownership renders the property liable to the claims, creditors, and liens of the other joint owners. If you add a third party to your bank account (or deed), that third party's creditors (whether present or future) can lay claim to that owner's respective interest in the property. If you don't like the idea of your child's creditors putting their hands in the metaphorical cookie jar, then don't add them to your bank accounts, deeds, or other property (put a locked lid on the cookie jar)! How certain can you be that any joint owner on your property will never experience a creditor problem? Most of us would answer, "Not too certain at all."Third, you may become incapacitated after creating a joint form of ownership in your property or otherwise have a falling out with a joint owner and desire to "undo" the plan (you want to remove that person from the account, deed, etc.). This is not easy. Again, if you've become incapacitated, it's even harder. If you create your own Last Will and Testament and disinherit an individual who you've already made a joint owner of an asset, it may likewise be next to impossible to remove that person from the bank account, deed, or other asset of which you added them as a joint owner: many banks will require the consent of all joint owners to remove one joint owner, and to remove a joint tenant from a deed, all joint tenants need to execute the deed! If you are not on good terms with the person whom you're aiming to be removed from your property owned in a joint form of title, it's easy to understand why this task will not be easy. As even parents and children can have a falling out and become estranged at different times in life, avoiding joint ownership in the first place (even if the joint ownership is "for purposes of convenience") may be the best choice.Tax Concerns
If you add another individual to your deed, bank account, or almost any other asset, there are two potential areas of concern: (1) the potential need to file a Federal Gift Tax Return (Form 709), and (2) the loss of a complete "basis adjustment" at death. The Internal Revenue Code (IRC) gives each of us an "annual coupon" for gifting to others, tax free (the legal term is "an annual exclusion gift"). You can gift up to this amount (the threshold, on other words) to each individual without "using" a related, but different coupon: the "lifetime coupon" for estate and gift tax (known as the "Basic Exclusion Amount" or BEA). In general, both coupons are indexed for inflation and are increased each year. For purposes of this article, we are noting that, for annual exclusion gifts in 2024, the annual limit you can gift to any number of persons is $18,000 (if you gift in 2024 more than $18,000 to your granddaughter, for example, you "eat into" your BEA, which is $13,610,000 per person in 2024, and may be reduced to around $6,500,000 as of January 1, 2026, and is a topic for another article). So, if you add your granddaughter as a joint owner on your bank account in 2024, and her 1/2 interest in the account exceeds $18,000, while it is true that you may be eating into your applicable BEA, the other important point is that this is a "gift" triggering a duty to file with the Internal Revenue Service (IRS) a Federal Gift Tax Return (Form 709), as the gift exceeds the annual excludable amount for 2024 gifts. The tax analysis may be different as between a married couple, though. Confused? This is why it is better to consult with a California gifting attorney and not your neighbor.A related concept (and concern) with joint ownership is capital gains tax (a form of income tax). To be clear, using your hypothetical granddaughter as an example, if you add her as a joint tenant on your deed (again, a joint owner on a deed is a joint tenant), or otherwise add her to your bank account, you're in effect gifting her 1/2 of the current value of the asset. Aside from the IRS Gift Tax Return (Form 709) issue, you're affecting her "basis" in the gifted asset. If your daughter were to inherit your home (either in trust or in probate), current IRS rules allow her to inherit a "basis" in the property based on its value as of the date of your passing (a basis "adjustment," which is often referred to a "Step Up In Basis"). Selling the property not too long afterward often results in ZERO capital gains tax (Sale Price - Basis), which is often very good news for your beneficiaries. But with a lifetime gift (adding your granddaughter to your bank account or deed) results in a "Carryover Basis": 1/2 of the property (the 1/2 that remains "yours") receives the basis adjustment at your death, while the other 1/2 does not. If this is not your intent (if your beneficiary or potential joint owner is younger or illiquid and would appreciate you not forcing them to pay capital gains tax), then it is recommended that you meet with an experienced tax attorney or elder law attorney to discuss your goals and delve into these concepts further. And again, the tax analysis may be different as between a married couple.A California Revocable Living Trust: The Better Option?
For these reasons, you may want to instead consider a California revocable living trust. A living trust is revocable, which means it can be amended, modified, and revoked (until, in general, you become incapacitated or pass away). Property titled to (owned by) your living trust avoids California probate. And you can build into your living trust a degree of potential asset protection as to your beneficiaries' creditors. In general, as long as you have capacity, if you come to learn that one of your trust beneficiaries is facing a lawsuit or creditor issues or otherwise no longer wish to include the beneficiary in your trust, you can make the appropriate change. A California estate plan that includes a living trust often achieves and can even exceed your original estate planning and tax goals.“If you add another individual to your deed, bank account, or almost any other asset, there are two potential areas of concern: (1) the potential need to file a Federal Gift Tax Return (Form 709), and (2) the loss of a complete "basis adjustment" at death. . . . A California estate plan that includes a living trust often achieves and can even exceed your original estate planning and tax goals.”
If you have questions about how to title your bank accounts, real estate, and other property, how to avoid probate, what needs to happen now that a joint owner has died, or otherwise have concerns about how and whether to change the current ownership forms of your assets (or perhaps you're a joint owner in need of counsel as to how to defend your interest), contact California estate planning attorney Ryan J. Casson at his Camarillo office, the Law Office of Ryan J. Casson.