Joint Tenancy Q and A
Joint Tenancy ownership is where two or more people hold title to an asset. Joint tenancy with rights of survivorship (JT/WROS) features a right of survivorship. The term "right of survivorship" means that upon the death of one joint owner, title passes by "operation of law" to the surviving owner who receives sole ownership of the asset. It is a type of ownership that will not be controlled by either your will or your trust.
Joint tenancy ownership does not provide protection for children when a surviving spouse remarries after the death of the first spouse. If a married couple owns all of their assets in joint tenancy and one spouse dies, all assets pass by operation of law to the surviving spouse. There may be no protection for children if the surviving spouse remarries and places his/her assets in joint tenancy with a new spouse. For example, if the surviving spouse predeceases the new spouse, all property passes to the spouse, not to the children as their parents may have originally intended.
The answer is that joint tenancy ownership often only delays the probate process. Upon the death of the first joint tenant, title passes automatically to the surviving joint tenant, thereby avoiding the probate process on the first death. Let's look at the example of a married couple who owns all of their assets in joint tenancy. On the death of the first spouse, there is no probate because ownership of the assets passes by operation of law to the surviving spouse. However, on the death of the surviving spouse, there will be a probate unless the surviving spouse creates a new joint tenancy or places his or her assets in a living trust.
Individuals often look at joint tenancy as an avenue to avoid probate or to have financial assistance. However, when a parent places a child on as a joint tenant on their real estate, stocks or other investments, they are often unaware that they have made a gift of one-half of the value of the property. If that value exceeds $10,000 in one year, the gift is a taxable gift and the parent must file a gift tax return.
As previously mentioned, property held in joint tenancy passes by operation of law to the surviving joint owner. Although title passes to the surviving joint owner, the value of the owner's interest in the property is included in his/her estate for federal estate tax purposes. Therefore, an owner's family may pay substantial federal estate taxes on property they do not receive.
Basis is generally defined as what you paid for an asset (cost basis). If you paid $1,000 for 10 shares of stock, your basis in the stock is $1,000. Different rules apply for inherited and gifted property. If you inherit property, your basis is the value of the property as of the date of death of the previous owner. If you inherited 10 shares of stock and the shares were valued at $50,000 as of the date of death of the previous owner, your basis in the shares would be $50,000. When you inherit property, you receive a 100% step-up in basis. However, if you receive a gift of property, you receive what is called a carry-over basis. In other words, if you received 10 shares of stock as a gift and the basis of the previous owner was $10,000, your basis in the shares would be $10,000. The basis "carries" over to you regardless of what the shares are worth at the time the gift is made. Therefore, it may be better to leave your heirs appreciated property rather than make an outright gift to them during your lifetime. With inherited property, your heirs will be able to take advantage of the step-up in basis when they proceed to sell the property.