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 seems 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, mostly based on the fact that 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 can try to collect on Lucy’s debt from her one-half interest in the house. Now, instead of protecting the house for Lucy after Jane dies, 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 tells his father he wants his inheritance now, instead of later. As we discussed in the last post, it is possible for a joint tenant to sever the joint tenancy (i.e., turn it into a tenancy in common). Once that is done, a co-owner can force the sale of the property through a special lawsuit called a “partition.” In a partition action, one co-owner asks the Court to order that the house 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 her 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 it at the auction, she loses the house.
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, and the original owner 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 give 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 she 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, she 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 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 next post.
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.