What's the deal with Joint Tenancy? Part 2: Risks

In a previous post, we talked about a joint tenancy and what it is. Briefly, it’s a way of owning property in Georgia where, if one of the co-owners dies, their interest in the property automatically passes to the other co-owner.

People frequently want to use this as a shortcut in estate planning. If the main asset of an estate is a house or land, then it may seem like it’s not necessary to make a Will. Joint tenancy is automatic and protects the property from (most) claims against the estate.

But there are some significant risks, because joint tenants are both owners of the property during their lives. That means that each co-owner has the full rights and responsibilities of a property owner.

First, this means that one co-owner’s interest in the property is available to their creditors while they are alive. Suddenly, the way of protecting property from claims against the original owner’s estate after their death actually opens up the property to claims against the new co-owner while they are alive.

Example 1: Jane, a parent, creates a joint tenancy with Lucy, her child. Then Lucy has some financial difficulty and cannot pay her credit card bills. The lender is allowed to collect on Lucy’s debt from her one-half interest in the house. Now, instead of protecting the house from Jane’s debts, she has actually put the house in danger of being used to pay Lucy’s debts. Jane and Lucy could both be out of the house.

The second big risk is a possible prodigal son issue. In that story, a rich man’s son demands his inheritance now, instead of later. Similarly, as we discussed in the last post, it is possible for a joint tenant to force the sale of the property through a special lawsuit called a “partition.” In a partition, one co-owner asks the Court to order that the property be sold at auction and the money split between the former co-owners.*

Example 2: Lucy decides she does not want to own her mother’s house later, but instead needs money now to pay off some debts. She can sever the joint tenancy, file a partition action to get the house sold at auction, and then take her half of the proceeds. Unless Jane buys the house at the auction, she loses it.

Finally, a deed is permanent. Creating a joint tenancy requires the owner to convey (give or sell) a property ownership interest to another person. Once that joint tenancy is created, the interest is conveyed to the new co-owner. The original owner cannot change their mind; they cannot take it back. The new co-owner is an owner of the property, just like the original owner. The only way to get sole ownership again is for the new co-owner to convey their interest back.

Example 3: After creating a joint tenancy with her daughter Lucy, Jane later discovers that Lucy has serious credit card debt. Jane does not want Lucy to be a co-owner anymore. But Jane cannot change her mind; she cannot force Lucy to give the interest back. All Jane can do is ask Lucy to deed back her interest in the property. At that point, Jane may be unwilling to give up such a significant asset (and it may even be illegal for her to transfer the asset away.)

So, while a joint tenancy can be seen as an easy and inexpensive way to protect an asset from probate claims, it can create a new set of problems during the co-owners’ lives. Even if the potential joint tenants are on good terms now, a lot can happen in the time between the creation of the joint tenancy and the death of one of them.

The good news is that there are alternatives, which we’ll discuss in our final post in this series.

*It is also possible to ask the Court to divide the property into separate parts of equal value. This is done most often with farmland or large pieces of undeveloped property. Most of the partition cases we deal with are houses, which cannot be split.

Photo by Rowan Heuvel on Unsplash.

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The statements in this blog are generalities, and exceptions exist. And, as always, this post is not legal advice. If you have any questions about this information, please contact us.