Asset Protection

JOINT TENANCY: TRAPS AND OPPORTUNITIES

A joint tenancy is created when real or personal property is equally owned by two or more parties with the express provision that title is jointly held.

Most states require the joint tenancy to be created by written agreement. Verbal agreement is insufficient. This joint tenancy acknowledgment may be stated in the deed, bill of sale, or other title documents such as a stock certificate. (Example: Mary Doe and/or Ann Smith, jointly, or as joint tenants.) The "or" indicates survivorship rights, which does not apply to a tenancy-in-common. When one joint tenant dies, the surviving tenant or tenants automatically assumes ownership of the deceased tenant's interest, even if the decedent bequeathed his interest in the property to someone else. Jointly owned property avoids probate (but not estate taxes), and this is its chief advantage and reason for its popularity.

Joint tenancy grants each owner an equal and undivided interest in the property. But this joint tenancy can be terminated if either joint tenant conveys his interest. The joint tenancy then automatically ends and the remaining joint tenants become tenants-in-common with the new owner.

How effectively does joint tenancy protect assets? A joint tenancy usually provides little protection over a tenancy-in-common. Creditors of one joint tenant can ordinarily reach his undivided interest in the property by petitioning the court to partition the property and order its sale with the proceeds divided. Several states make it impossible to partition jointly owned property if such an agreement exists between the co-owners. This agreement can be important in asset protection because it defeats the right of the creditor to liquidate the debtor-owner's interest. Creditor protection with a joint tenancy can vary considerably among states. So carefully check the laws in your state before you rely upon joint-tenancy as your asset protector.

Most states allow the debtor-joint tenant's interest to be reached by his creditors during his lifetime. Since each joint tenant, during this period, can freely transfer his interest, his creditors are allowed to reach that same interest to satisfy that joint tenant's debts. The creditor's forced-sale position places the creditor and his buyer in the same position as someone who buys the asset directly from the joint tenant: The joint tenancy is destroyed and the creditor or his nominee buyer becomes a tenant-in-common with other co-owners.

Creditors generally cannot proceed against jointly owned property once the debtor-joint tenant dies because his interest automatically passes to the other co-owners, but there are four important exceptions:

1. A joint tenancy expressly established to defraud creditors can be set aside; however, a joint tenancy does not evidence fraud.

2. Unlike other debts, federal and state taxes owed by a deceased joint tenant attach to the joint interest and pass with the property of the deceased to the surviving tenant.

3. Several states grant creditors unusual rights against jointly held property. Washington State and South Dakota, for instance, allow creditors of a deceased joint owner the right to reclaim the debtor's investment contribution in the property, although such laws are rare.

4. A creditor's rights against a joint tenant also expand if that joint tenant files bankruptcy. The debtor's entire property becomes subject to bankruptcy, including jointly held property. A bankruptcy trustee may sell all property of the bankrupt co-owner, including jointly owned property. The non-bankrupt co-owners must then protect themselves by claiming their share of the sale proceeds from the property, otherwise all sales proceeds can be applied to the bankrupt's debts.

All assets, except for IRAs, Keoghs and insurance, can be jointly owned. You can also avoid probate when all assets are jointly held. But joint tenancy is not necessary to achieve asset protection and probate avoidance. For probate avoidance alone, you can title property in a living trust or limited partnership owned by your living trust as the limited partner.

A creditor's rights against jointly held property ends with the death of the debtor. And an attachment during the debtor's lifetime must be liquidated through partition and sale of the property while the debtor remains alive because the debtor's joint interest automatically passes upon death to the surviving joint tenant, and the survivorship transfer would then extinguish the attachment and creditor's rights against that interest. Should the non-debtor joint tenant die first, the creditor would gain the entire property. Survivorship works both ways. Creditors with a judgment sometimes sit on their rights while awaiting the death of the other owner in a winner-take-all, particularly in states where joint tenancy effectively protects against creditors.