Joint Tenancy: Benefits and Pitfalls

It's a common practice for couples and business partners to take title to each other's bank accounts, brokerage accounts, real estate and/or personal property as joint tenants with rights of survivorship (JTWROS).

JTWROS is a type of account that is owned by at least two people, in which all tenants have an equal right to the account's assets and are afforded survivorship rights in the event of the death of another account holder. In simple terms, it means that when one partner or spouse dies, the other receives all of the money or property. This is why many married couples and business partners choose this option. However, there are some things you should consider before entering joint tenancy. Below, we'll take a look at the advantages and disadvantages of this arrangement.

When an individual dies, his or her will is reviewed by a probate court. The court's purpose is to decide whether the will is valid and legally binding, as well as to determine what liabilities and assets the deceased may have. After a thorough review, any remaining assets after all debts are settled are then distributed to heirs. If an individual dies without a will, a complicated process takes place within the probate court because the court does not have any written evidence of how the deceased would like the assets distributed.

The downside to the probate process is that it can take weeks, months – or even years, when dealing with complicated estates – to sort through the deceased's estate. This means it will take even longer for beneficiaries to receive their inheritance. However, because JTWROS automatically transfers ownership to the other spouse or business partner upon the death of the first partner, it avoids probate. This is an enormous advantage for those who need the funds immediately.

When a married couple or two business partners own an asset that is titled JTRWOS it means that both individuals are responsible for that asset. In other words, they both enjoy its positive attributes and share in the liabilities equally. This also means that neither party can incur a debt on the asset without indebting themselves.

For example, a husband, knowing that he is about to divorce his wife, cannot obtain a loan against the value of the couple's home with the intention of leaving the debt with his wife. The moment the husband takes out the loan, he is equally responsible for its repayment. Similarly, the husband may not lease a portion of the property without sharing the proceeds with is wife.

When someone dies, his or her assets are often frozen until the probate court determines whether the assets are encumbered, or until a determination is made about how to distribute them to heirs. This can be a problem for a surviving spouse who has outstanding debt or expenses.

However, by owning an asset as a joint tenant, the surviving spouse or business partner may use the property in any fashion he or she sees fit, whether that means holding it, selling it or mortgaging it. In fact, the law states that immediately upon the death of one tenant, ownership is transferred to the survivor.

Having two people own the entire asset is a disadvantage in an unstable relationship, regardless of whether the relationship is personal or professional. For example, if a couple is going through marital problems or two business partners are on the outs, neither party can sell or encumber the asset without the other party's consent. Or, suppose the asset is owned with an estranged child. Before the asset can be sold, the parent(s) would have to get permission from the child and, in some states, from the child's spouse as well.

If the deceased is heavily in debt and the probate court is afraid that the surviving spouse or business partner may liquidate the funds in order to avoid paying the obligations, the court could freeze the account. In addition, an account may be frozen if there is a dispute over whether the surviving spouse or business partner actually contributed to the account, or if the ownership was merely for convenience. In some cases, the asset may still be frozen upon death of either partner or spouse.

When the surviving spouse or business partner assumes control over the joint asset upon the death of the co-tenant, he or she may then sell it, or bequeath it to someone else. In other words, the deceased loses control over the ultimate disposition of the asset entirely.

The alternative to joint tenancy is tenancy in common. Some of the benefits to this account are:

• The asset is divvied up. Each owner may own one half of the asset or a percentage or fractional ownership can be established. Also, each party can legally sell his or her share without the other party's approval or consent.
• The asset will pass to heirs. Unlike with JTWROS ownership, of the asset will not automatically transfer to the surviving account owner upon the first owner's death. In fact, the asset will pass according to provisions made in the deceased's will. Typically, most tenants leave the asset to their heirs. However, it could still pass to the other account owner if the deceased makes such a provision in his or her will.
• Assets can be accessed. If one owner becomes disabled or dies, the other owner should still be able to access his or her portion of the assets. This means that he or she can sell a portion of the asset or dispose of it in any manner without having to wait on a judgment from a probate court.

Both JTWROS and tenancy in common have attractive features. However, prior to setting up either arrangement, all individuals must first assess their situations to determine whether one option is more favorable than the other.