By: Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™

When I give the CWPP™, CAPP™, MMB™ seminars, I always start out with three hours  on asset protection planning.  Why? The reason is simple, NO financial or estate plan can be complete without incorporating asset protection planning.  You may help a client setup the “perfect” financial or estate plan and if asset protection planning was not part of the plan, a negligence suit can wipe out a client’s wealth.

It is for this reason that I strongly advocate that all advisors insurance, financial, mortgage, CPA/accountant/EA and attorneys learn this subject matter and is also one of the reasons I created the certification courses and co-founded the Asset Protection Society.

For this week’s newsletter, I thought I would cover a specific way to own real estate (Joint Tenancy) that is a terrible idea from an asset protection standpoint and unfortunately or fortunately depending on your opinion, it is the most common type of way to own real estate in this country.

I say the word “opportunity” over and over and over at my seminars when discussing asset protection (AP) planning.  One great thing about learning proper AP techniques is that it opens up a world of opportunity for advisors to talk with clients and point out to them that they need help (from the advisor) to protect their assets.  Joint Tenancies (JT) open up a world of opportunity because the vast majority of people in this country own something of value as a JT with another individual.

Joint Tenancy (JT)

Definition of Joint Tenancy:

“A single estate in property, real or personal, owned by two or more persons, under one instrument or act of the parties, with an equal right in all to share in the enjoyment during their lives. On the death of a JT, the property descends to the survivor or survivors and at length to the last survivor.” Barron’s Dictionary of Legal Terms.

 

From a legal perspective, the rights of all the owners of a piece of property owned as JT are all the same.  Those rights are as follows:

1) The right to use the whole property (with land, the right to occupy the entire property, with stocks or bank account money, the right to spend the whole amount).

2) The right to transfer the interest in the property without asking permission of the other co-owners.  Each co-owner’s interest is owned individually and, therefore, can be sold, gifted, or transferred without permission.   When a JT interest is transferred, the new owner also has access to the whole asset (which is why JT is so unique).

3) A survival right–when a JT dies, the share of the deceased tenant automatically becomes that of the other co-owners.  In other words, a JT cannot transfer his/her interest at death.

Why is JT used?

Unfortunately, JT is the most common form of co-ownership for many types of assets (such as bank accounts, brokerage accounts, and real estate).  The reason is fairly simple¾when one joint owner dies, the entire asset becomes that of the other JT.  What does this accomplish?  The asset that passes to the other JT does not pass through the estate of the deceased tenant, thereby avoiding probate fees and estate taxes.

Example:

Dr. Smith owns his vacation home in Florida through a joint tenancy with his two children. Each owns a 1/3 interest in the property.  When Dr. Smith dies, the vacation home passes to the children who now each have a ½ interest in the property.  The million-dollar vacation home did not pass through the estate and, therefore, saved the estate 4-6% of the total asset in probate fees and $500,000 in estate taxes.

That sounds wonderful.  So why don’t I like joint tenancy?

1) Joint tenancy can be severed.  If one of the JTs sells or transfers his/her interest in the property, the joint tenancy becomes a tenancy in common (discussed in future newsletter).  Since there are no restrictions to prevent this, one joint owner can transfer his/her interest without the other owners knowing; and doing so, in many cases, will defeat the original purpose of the joint tenancy.

2) The joint tenancy is an asset of each co-owner and is subject to his/her creditors.  So, if one joint owner was sued for malpractice or negligence and lost, the creditor could end up with that joint owner’s interest in the property, which would also partially destroy the joint tenancy; or, potentially, the entire property could be sold to satisfy the debt of one of the co-owners.

Example:

Dr. Smith owns property worth 1 million dollars as JTs with his sister.  Dr. Smith is sued for malpractice and has a judgment against him for $3,000,000 (and he only has $1,000,000 worth of malpractice insurance coverage).  The creditor/patient can ask the court to sell Dr. Smith’s property that is owned by joint tenancy with his sister, or the creditor could ask the court to have Dr. Smith transfer his interest in the property directly to the creditor.  Each transaction has its own consequences, but the bottom line is that the asset, owned by a joint tenancy, IS subject to the creditors of each co-owner.

3) Gambling on life.  Joint tenancy (unless severed) is a roll of the dice for the owners. Whoever lives the longest gets the asset.  Most of the time, that is not the intent of the co-ownership arrangement, and many times, the people in a joint tenancy do not even realize the potential problems.  This arises most often when a parent is trying to avoid probate and estate taxes on a piece of property and wants to give an equal share in the property to the children.

Example:

Consider this horror story.  Dr. Smith gets remarried and has three children from a previous marriage.  He has $4,000,000 worth of assets, of which he would like $2,000,000 to pass to his children at death.  Dr. Smith, right after re-marrying, puts all his assets into a joint tenancy with his new wife.  His will and trust direct that $2,000,000 of his estate goes to his children.

When Dr. Smith dies, all this property owned as a JT with the spouse is immediately removed from his estate and is now owned 100% by his new spouse.  There is nothing left to go through the will or trust, and Dr. Smith’s children get NOTHING.

Where should most valuable property be owned?

Inside a properly setup family limited partnership or limited liability company.  If you don’t know why, click here to read about the proper uses of FLPs or LLCs for asset protection planning.

Summary on Joint Tenancy:

Make sure that your clients have a valid reason for using a joint tenancy.  Ninety-nine percent of the time, a joint tenancy will not fulfill a client’s needs of asset protection and estate planning.  The assets owned as a joint owner are not asset protected, and unless death occurs just as the client planned, chances are significant that the joint asset will not pass to the client’s heirs as planned.