Understanding Joint Tenancy in California
In an earlier post, we discussed why your beneficiaries would think Avoiding Probate is an excellent idea.
We also discussed how certain Assets Not Subject to Probate can avoid the Probate process, including those assets that qualify for the California Small Estate Affidavit procedure, or Assets that Pass by Operation of Contract.
Now, we will examine the concept of Joint Tenancy, and whether it makes sense to use Joint Tenancy as a means to Avoid Probate.
What is Joint Tenancy with Right of Survivorship?
Joint Tenancy, or Joint Tenancy with Right of Survivorship, is a legal designation that allows certain assets to go to the surviving Joint Tenant without being subject to Probate.
People use Joint Tenancy because it is easy to set up. All that is necessary is for the financial account or real property deed to reflect that there is joint ownership with right of survivorship.
What are the Disadvantages of Joint Tenancy with Rights of Survivorship?
- Both Joint Tenants are co-equal Owners, there can be no disproportional ownership (i.e. 1/3 owned by Person A, and 2/3 by Person B)
- Because all Joint Tenants legally own all of the property, the entire property is subject to the Creditors of any Joint Tenant
- Assets owned in Joint Tenancy do not get a full Step-up-in-Basis (for capital gains tax purposes) at the death of a Joint Tenant.
- A Joint Tenant’s Interest in the Property may only be left to the surviving Joint Tenant – they may not leave it to their children, their Trust or Estate or any non-Joint Tenant.
- Joint Tenancy ends after the first transfer of the property. If the other Joint Tenant has died, or dies without naming a new Joint Tenant, the property may be subject to Probate
- If all Joint Tenants die at the same time, the asset may be subject to Probate
Joint Tenancy Does Not Allow for Disproportional Ownership
Unlike Tenancy in Common, Joint Tenancy does not allow for disproportional ownership of the asset. Each and every Joint Tenant owns the entire asset.
If one Owner of the Property has contributed more (or less) financially to the purchase of the asset, it does not matter. Every Joint Tenant owns the same amount, irrespective of financial (or other) contributions.
With Tenancy-in-Common, by contrast, ownership can be set up in any manner of percentages. If one owner contributes 5% of the purchase price, they can be established as a 5% Tenant-in-Common.
Joint Tenancy Property May Only Be Left to Other Owners, not to Heirs or Beneficiaries
Because Joint Tenancy is equally owned by all of the Joint Tenants, no Owner has a right to dispose of their share of the property to their heirs, beneficiaries or any other person. When the Owner dies they may only leave it to the other Joint Tenants.
You cannot add your share of a Joint Tenancy property to your Living Trust. Doing so would sever the Joint Tenancy and render it void.
Joint Tenancy Property is Subject to the Creditors of All Joint Owners
Because Joint Tenancy is equally owned by all of the Joint Tenants, if any one of the Joint Tenants finds themselves in financial distress, or on the receiving end of a Judgment Order by one or more creditors, the entire Joint Tenancy asset can be seized to satisfy an Order against any single Joint Tenant.
Grandma has one house and no children. She only has one grandchild, and to save money, decides to add her grandchild to her house as a Joint Tenant.
Grandchild has a drinking and gambling problem. One evening, the grandchild gets in a car accident that is their fault, and later has a judgment order placed against them and all of their assets to satisfy the judgment against them.
Legally, Grandma’s house can be sold or transferred to the Creditors of the grandchild, and Grandma could be out on the street. The law of Joint Tenancy says the entire property belongs 100% to both joint tenants. While adding her grandchild could allow her to potentially avoid Probate, the risk of loss may prove unacceptable.
Joint Tenancy Works to get the Property to the Surviving Owners, but Not Beyond That
While one of the main reasons to use Joint Tenancy is to avoid Probate, this is not automatic. One of the little known secrets in Probate Law is that Joint Tenancy assets do not always escape Probate. In fact, it is common for Joint Tenancy property to wind up in Probate Court after the death of the surviving tenant.
Where there are 2 Joint Tenant owners of a property, Joint Tenancy works exactly once. If one Joint Tenant dies, it becomes the property of the surviving owner. If the remaining owner forgets to add the property to their Trust, and they die, it could wind up in Probate. Likewise, if there is a common accident, or both Joint Tenants die at the same time, the asset will almost certainly wind up in Probate.
Joint Tenancy vs Community Property
Joint Tenancy is a form of property ownership in which two or more people share undivided interests in a property. Joint tenants have an equal right to use and enjoy the property, and they also have an equal right to sell or transfer their interest in the property. Joint tenancy is often used by family members or close friends who want to own property together.
Community property is a form of ownership in which husband and wife each own an undivided half interest in all community property. Community property laws are based on the premise that husband and wife equally contribute to the acquisition of property during marriage. These laws are designed to provide economic fairness to both spouses in the event of divorce or death.
From a Capital Gains Tax perspective, owning real estate (or other property) in Community Property has a distinct tax advantage over owning property in Joint Tenancy. If a husband and wife own property as Community Property, and one spouse dies, then the property receives a full stepped up basis for Capital Gains as of the death of the first spouse.
Practically speaking, this means Capital Gains are wiped out at the first death for all assets held in Community Property, or in Community Property with Rights of Survivorship.
By contrast, property held by a married couple in Joint Tenancy does not receive the full stepped up basis for Capital Gains Tax purposes at the death of the first spouse. Property held in Joint Tenancy only receives a one-half stepped up basis at the death of the first spouse. Thus, practically speaking, only half of the Capital Gains are wiped out at the death of the first spouse to die.
Joint Tenancy with Rights of Survivorship Frequently Asked Questions
What is the difference between Joint Tenancy and Tenancy in Common in California?
Joint tenancy and tenancy in common are two common types of co-ownership agreements that govern jointly owned property in California.
Joint tenancy requires that all tenants have an equal undivided interest in the property and the right of survivorship, meaning that if one tenant dies, their interest in the property passes to the remaining tenants.
Tenancy in common, on the other hand, allows tenants to own unequal undivided interests in the property with no right of survivorship. This means that if one tenant dies, their interest in the property is not automatically passed on to the remaining tenants.
Tenancy in common may be a better fit for certain situations, such as when co-owners have unequal ownership rights in the property, or when they want to leave their interest in the property to someone other than the other tenant/s.
How do I Break a Joint Tenancy in California?
Breaking (or Severing) a Joint Tenancy in California is relatively simple. Any written or express agreement between the Joint Tenants to no longer hold the property as Joint Tenants should be sufficient. Actions that are inconsistent with the purposes of Joint Tenancy may also sever the Joint Tenancy.
“A mutual agreement between joint tenants that is inconsistent with one or more of the four essential unities of a joint tenancy or that alters the title interests therein may sever the joint tenancy.” – Estate of Blair (1988) 199 Cal.App.3d 161
For real estate, if one Joint Tenant executes and records a Deed putting their share in their own name, or in their own Revocable Trust, the Joint Tenancy is deemed to be severed.
How do you know if your joint account has right of survivorship?
The financial custodian (bank, investment company, etc.) will be able to determine if your jointly held account has a right of survivorship provision.
How do I change joint tenancy to community property with right of survivorship in California?
As it pertains to real estate, there are two equally valid ways of accomplishing this. The first way is to execute and record a deed, transferring the real estate from Husband and Wife as Joint Tenants to Husband and Wife as Community Property with Rights of Survivorship. The second way is to execute a Marital Property Agreement, in which both spouses agree to hold all assets as Community Property, and expressly cancel all Joint Tenancy holdings.
Conclusion: Joint Tenancy carries many risks, many of which are Unnecessary
For many families, the Disadvantages of Joint Tenancy outweigh the benefits, especially when a Living Trust can accomplish the same objectives without the downside.
We believe the Living Trust remains the best option for helping your family avoid Probate.