Planning for the future often includes finding strategies that simplify asset distribution and reduce expenses. Joint tenancy is frequently used as a way to avoid probate, the legal process that oversees the division of a deceased person’s estate.
However, joint tenancy can come with significant risks. A more secure and flexible option may be to establish a living trust. Let’s dive into these two strategies.
Joint Tenancy: A Risky Solution?
Joint tenancy is a type of property ownership where two or more individuals share equal ownership of an asset. When one owner passes away, their share automatically transfers to the surviving owner(s) or “joint tenants” through a principle known as the right of survivorship. This direct transfer allows the asset to bypass probate.
Despite the seeming convenience of joint tenancy, it has several substantial downsides:
1.) Reduced Control: Once a joint tenant is added to your property, you lose complete control over it. All significant decisions about the property, such as its sale, require all joint tenants’ agreement.
2.) Creditor Vulnerability: If a joint tenant accumulates large debts, creditors may place a lien on the shared property, even if the debt isn’t related to the property.
3.) Possible Gift Tax Consequences: Adding someone as a joint tenant to your property may be viewed as a gift by the IRS, which could lead to gift tax implications.
4.) Risk of Unintended Disinheritance: If you add one of your children as a joint tenant for ease of management, they could unintentionally inherit everything upon your death, leaving your other children disinherited.
Living Trust: A More Secure Strategy
In contrast, a living trust, a legal entity you form to hold your assets during your lifetime, provides a more reliable, manageable way to bypass probate when transferring assets.
Consider these advantages of a living trust:
1.) Complete Control: As the trustee of a living trust, you have total control over the assets in the trust. You can modify, add or remove assets, or even dissolve the trust altogether if you choose to do so.
2.) Beneficiary Creditor Protection: Assets within a living trust will be protected from the beneficiaries’ creditors because the trust will become irrevocable after the death of the grantor. Plus, the grantor can dictate long-term, limited distributions to prevent reckless spending.
3.) Prevents Unintended Consequences: With a living trust, you can clearly detail how you wish your assets to be divided after your death, ensuring your wishes are followed and preventing unintentional disinheritance. You can also limit the possibility of an estate challenge through the inclusion of a no-contest clause.
4.) Incapacity Planning: Living trusts also include provisions for handling your affairs if you become mentally incapacitated, which can save your family the trouble and expense of court-supervised guardianship.
5.) Privacy: Since a living trust is administered outside of probate, interested parties cannot pry into the details.
6.) Avoids Multiple Probates: If you own properties in multiple states, a living trust can avoid ancillary probate proceedings, which can be quite problematic on multiple levels.
Consider Your Choices Carefully
While joint tenancy may initially seem like a simple solution to avoid probate, the possible risks and complications make it a less-than-optimal choice for many. A living trust, though requiring more initial effort to establish, provides a versatile, controllable, and protective alternative for estate planning.
Schedule a Consultation Today!
As you can see, mistakes can be made when you take action without fully understanding the potential consequences. This is one of the reasons why it is important to engage legal counsel when you are planning your estate.
There are various ways to proceed, and the best choice will depend on the circumstances. When you work with us, we will learn about your situation and your goals and help you devise a plan that will actualize your legacy vision.
You can schedule a consultation at our Phoenix, AZ estate planning office if you call us at 888-222-1328, and you can fill out our contact form if you would rather send us a message.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.
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