You probably already know that assets and property held in joint tenancy can evade probate proceedings—but what really goes on when two individuals own equal shares of an entire property?
Words like “right of survivorship,” “tenancy-in-common,” “inheritance tax” and other joint tenancy jargon may sound Greek to the layperson looking for a means to get assets into the hands of beneficiaries quickly after passing away.
The joint tenancy advocates at Iowa Probate Litigation would like to help you figure out this important estate planning instrument by answering some frequently asked questions brought by our readers inquiring about the pros and cons of co-ownership.
What’s the difference between joint tenancy with the right of survivorship and a tenancy in common?
Joint tenancy with the right of survivorship is an estate planning tool that allows you to receive a direct title of co-owned property when another co-tenant passes away.
The “survivorship” element in your joint tenant agreement is noteworthy because without it you would carry a tenancy in common, meaning upon the death of a co-owner the deceased tenant’s interest passes to his/her heirs via testamentary documents or intestate succession.
What is tenancy by the entirety?
Iowa statutes disallow its citizens to hold tenancy by the entirety ownership. Some neighboring states (i.e. Illinois) do however recognize this concurrent title as a genre of joint tenancy law where individuals may co-own property with the right of survivorship.
Yet, tenancy by the entirety is unique because it only attaches to assets owned by married couples, and the ownership forbids creditors from placing liens on or selling tenancy by the entirety property when a co-owner debtor goes bankrupt.
Who executes joint tenancy and what do they commonly own?
Estate planning attorneys often prepare co-ownership agreements for married couples, siblings, and family members. But non-related individuals such as business partners, friends and neighbors can pursue joint tenancy as well. Co-ownership can attach to most real property or personal assets, including homesteads, automobiles, bank accounts, stock certificates, business property or interests, art and heirlooms.
What happens to joint tenant property when a co-owner passes away?
By operation of law, property or assets you acquire in joint tenancy will pass directly to the surviving co-owner upon your death. The property therefore avoids probate asset distribution. Executors may however include your joint tenant property in the gross estate inventory for tax and probate fee assessment.
If co-owned assets evade probate, why must I pay state taxes and probate fees?
In Iowa, when the decedent’s assets exceed a value of $25,000 after settling debts and liabilities, the executor must file an Iowa inheritance tax return. This is not an estate tax levied against all assets and properties—it only applies to specific beneficiaries.
Married couples and lineal ascendants or descendants (i.e. grandparents, parents, children and stepchildren) who hold joint tenancies with right of survivorship are entirely exempt from the Iowa inheritance tax.
Assets jointly held by other surviving co-owners, including distant relatives, friends and business partners, are exempt from probate administration, but executors could include them in the gross estate inventory for inheritance tax assessment. Always ask your estate attorney if your joint tenancy asset is tax exempt before executing a co-ownership agreement.
What other taxes attach to co-owned property?
The Iowa inheritance tax is one of four duties that governments may impose on joint tenant property with the other three being federal income, estate and gift tax. The latter assessment is the most concerning for individuals considering co-ownership.
When the surviving tenant is a non-spouse (i.e. child, friend or business partner), federal tax agencies may regard the natural exchange of joint tenant assets that occurs upon death as a gift.
In such case, the so-called donee (surviving tenant) must file a gift tax return with the IRS for any amount over $14,000 received from the donor (deceased co-tenant)—a duty that can reach up to forty percent when expensive real estate is involved—thus costing joint tenants much more money that they would have saved had they not entered into co-ownership.
Because of the complexity surrounding gift tax issues, we suggest that you consult with an experienced probate attorney before jumping into co-ownership.
Can I sell or assign my joint tenant interest to another party?
If you wish to sell, refinance or assign your interest in co-owned property, you can only do so with the other joint tenant’s permission. This also remains true if you want to terminate the joint tenancy entirely. However, some joint tenant agreements allow co-owners to transfer title to third-parties freely.
Such obstinacy is one of the biggest complaints of entering into a joint tenancy—while co-ownership avoids probate and simplifies the transfer of assets after death, it also removes a home owner’s flexibility and can complicate property rights while you’re alive.
Can another co-owner take control of my ownership rights?
Your joint tenancy will end and turn into a tenancy in common when another co-owner transfers his/her title to a third party (see above). A co-owner may also petition an equity court to dismiss your joint tenant title if he/she can show just cause to do so—although such action is rare and the courts refrain from removing a joint tenant’s title.
Co-owners may also wrongfully take control of your ownership rights by disallowing you to enjoy the jointly held asset fully, a situation that often arises when a joint tenant withdraws funds from a co-owned bank account without the other co-owner’s permission.
How does creditor liability affect joint tenancy in Iowa?
The creditors of either joint tenant can seize any co-owned property if his/her debts become due. This means if you own a home in joint tenancy with your son and he loses his job, the bank that loaned him the money to buy his new car can reach the full value of the co-owned asset, regardless of how high of an equity share you hold in ownership.
Another typical example of creditor liability arises when you co-own a car and another joint tenant gets into an accident; if the insurance doesn’t cover all damages, you may be on the hook to pay the difference because you’re part-owner of the vehicle.
Can my brothers or sisters contest the joint tenant property I hold with my parents?
Once an asset automatically passes to you after the death of another co-owner, any interested party (including your siblings) may sue you if they possess evidence that undue influence or lack of testamentary capacity occurred during the joint tenant agreement’s execution.
Your parents may have inadvertently created family hostility among your brothers or sisters when adding only you to their real property deeds or bank accounts, which may provoke your siblings to bring a frivolous claim against your joint tenant property rights.
That being said, if your were in a confidential relationship with the deceased joint tenant, you must be prepared to rebut a presumption of undue influence against you or prove the deceased co-owner held the capacity to make you a joint tenant after you receive an almost-certain lawsuit brought to dismiss your co-ownership rights.
Do joint tenant assets always avoid probate?
Co-ownership is merely a temporary probate avoidance tool, since your co-owned property will someday pass through probate when the last joint tenant passes away. You may however extend probate evasion if you’re the last joint tenant by simply adding another co-owner to the title while you’re alive.
What happens when a will conflicts with joint tenant ownership?
Iowa law presumes you hold a tenancy in common unless a preceding joint tenant agreement expressly affirms that you co-own the property with “full rights of survivorship and not as tenants in common.”
With the right of survivorship appropriately in your hands, any will provision that attempts to remove your property interest or terminate your joint tenancy is invalid and has no legal effect.
This means the decedent’s heirs cannot take your joint tenant property away from you, even when the deceased’s will seeks to pass his/her share of the asset on to other beneficiaries.
Can the courts infer co-ownership rights on real property held by surviving spouses where no joint tenant agreement exists?
Iowa Code 557.15 allows the courts to presume a surviving spouse holds real estate in joint tenancy instead of a tenancy in common if the married couple executed the deed before January 2015.
You may therefore assert your right of survivorship without possessing a formal joint tenant agreement if you hold a modern title to real property—the presumption however would only apply to deeds executed after 2015 whereas older real estate holdings may not automatically vest to the surviving spouse.