Joint Tenancy is truly the “hypocrite” of all estate planning techniques because it appears deceptively simple and predictable, yet problematic upon closer inspection. All too often, one who uses joint tenancy buys into the lie that because property will eventually transfer to the survivor of two joint tenants upon the death of the first, that Joint Tenancy is truly the “Holy Grail” in estate planning. But this is far from the truth.
What is a Joint Tenancy?
A joint tenancy is a concurrent property interest that permits two or more individuals or legal entities to hold title to real, personal, and intellectual property. Fundamentally, it is a way for two or more persons to be seized in property as if they were one person. Graham v. Allen, 11 Ariz. App. 207, 208, 463 P. 2d 102, 103 (1970).
At common-law, the four unities of time, title, interest, and possession were required to create a joint tenancy. Kleeman v. Sheridan, 75 Ariz. 311, 315, 256 P. 2d 553, 555 (1953). This means that (a) all of the joint tenants must acquire their interests from the same source, (b) they must have identical shares, (c) they must all take at the same time, and (d) the possession of each is the possession of all.[1] A joint tenancy could not arise by descent or other operation of the law but may arise by grant, devise, or contract.[2] Inherent in a joint tenancy estate as well, and without which it does not exist, is the right of survivorship.[3]
For example, say a mom and dad own a residence as Joint Tenants with Right of Survivorship in Arizona. When mom dies, mom’s interest in the residence survives to dad, meaning dad now owns the entire residence and title to the property passes outside of probate. At that point, dad must either record a death certificate or an Affidavit of Death of Joint Tenant to clear the chain of title to the property so the property is in his name alone. (Assuming there are no clouds or encumbrances on the property.)
Accordingly, in the minds of most people, holding property in Joint Tenancy is a very easy way to do estate planning because when one of the joint tenants die, the property avoids going through probate.
Incapacity Creates Problems
But, individuals who hold title to property as joint tenants cannot act as agents of each other; except to the extent of his proportionate share.[4] And, a joint tenant has the right to at least his proportionate share of his joint tenancy interest. 20 Am. Jur.2d Cotenancy and Joint Ownership § 17.
If, in the above example, mom became incapacitated and dad wanted to sell the residence, he would not have the authority to do so unless there was a separate agency document e.g., a Financial Power of Attorney, that named dad as mom’s agent. (This would also require that the Power of Attorney grant dad the authority to sell the house, and likely make a gift to himself.)
To this extent, an estate planner must consider the ramifications when a joint tenant becomes incapacitated when suggesting a client use Joint Tenancy.
Destroying the Joint Tenancy
A joint tenancy can be destroyed known as severance. A joint tenancy is severed by (a) mortgage or creation of a deed of trust, (b) transfer to a revocable or irrevocable trust, (c) contract to convey the property, or (d) destruction of one or more of the four unities; and the result is the failure of the right of survivorship. In re the Estate of Estelle, 122 Ariz. 109, 593 P. 2d 663 (1979).
In Arizona, both personalty and realty can be titled in joint tenancy. Deeds to real property are mere evidence of title; and, when title has vested in the grantee by delivery of the deed to him, the title remains in the grantee even if a deed conveying the same were destroyed. [5]
So why might one want to destroy a joint tenancy? Perhaps to create a living trust and fund the trust with the property previously titled in Joint Tenancy. Or, to avoid the need to rely solely on a Financial Power of Attorney during a time of incapacity.
A good reason to sever a Joint Tenancy would be to transfer one’s property to a Living Trust. Understand that a living trust will name a Trustee to manage trust assets (including a home, bank accounts, stocks, etc.) when a Trustor has capacity, is incapacitated or has died. And, the trust terms will state the conditions upon which the Successor Trustee can act. (Usually, a trust states that two physicians must determine that the Trustor is incapacitated.) It follows that because the Trustee holds title to the trust property, the Trustee will have the right to sell the property, encumber the property, and even gift it, so long as such powers are granted under the trust. Finally, with the trust, the need for a Financial Power of Attorney is minimized because the Trustee acts as the incapacitated Trustor’s fiduciary over trust assets.
Tax Problems
Sometimes, we forget that almost every transaction may involve a potential tax. If for example I take my $500,000 residence and transfer it to my son and myself as Joint Tenants, then I have made a taxable gift to him of one-half of the value of the property minus the annual exclusion of $15,000 for 2021. Arguably, this gift would require I file a 709 Gift Tax Return for 2010. Now, as long as one is aware of this and have no problem with making the gift and reporting it, then the creation of the joint tenancy is fine. But, if my intent is to create the joint tenancy as part of my estate planning and I am not aware of the gift tax consequences, then I may be setting myself up with a visit from the IRS.
Likewise, if my son owns the property with me as a Joint Tenant and then he becomes involved in an auto accident, I can be reasonably certain that my residence will be subject to a judgment creditor arising from an almost sure to follow personal injury lawsuit. Certainly, this makes me think twice about whether I would want to subject my assets to my son’s or any joint tenant’s creditors.
Is Joint Tenancy then Taboo?
All in all, holding title to property in Joint Tenancy should not necessarily be avoided like the plague because there are some benefits such as probate avoidance and survivorship rights which might be considered proper planning in certain limited circumstances. Nevertheless, like any estate planning device, Joint Tenancy must only be used to accomplish specific estate planning objectives after considering all potential ramifications and options.
For more information or if you have questions, please contact Mesch Clark Rothschild’s Estate Planning attorneys at (520) 624-8886 to make an Estate Planning appointment.
IMPORTANT: Neither this blog article nor any information on this website shall be construed as the offering or rendering of any legal advice and does not establish an attorney-client relationship between the reader and Mesch Clark Rothschild, (“MCR”) or any attorney at MCR. You should consult with an attorney if you have a specific question regarding your legal issues.
[1] Allen, supra at 208 (1970).
[2] Sheridan, supra at 315 (1953).
[3] Id.
[4] Ferree v. City of Yuma, 124 Ariz. 225, 603 P. 2d 117 (1979).
[5] Sheridan, supra at 316 (1953).
