Most folks don’t know about the dangers that joint tenancy may bring after execution.
Joint tenancy is an estate planning instrument that creates co-ownership in an asset and allows for property interests to move to surviving tenants automatically upon the death of a co-owner.
Co-ownership likewise serves as a probate-avoidance tool, but such titles can sometimes do more harm than good when applied incorrectly.
Let’s have a closer look at the challenges that arise with joint tenancy ownership and discover how you can tackle them through proper estate planning.
Joint Ownership Overrides Your Estate Plan
Regardless of what your Will or Trust says, your joint tenant property interest will always bypass probate and automatically transfer to the surviving co-owners upon your death.
Case Example: Imagine your mother lives with your brother in another state. To avoid hassles when your brother pays your mom’s bills and performs her bank transactions, mom decides to add your brother to her bank account.
Your mother however intends to leave her entire estate to you and your brother equally.
If your mom’s bank account remains in joint tenancy at the time of her death, you cannot inherit half of the money. Your brother would be the absolute owner of the cash assets, since he would be the only surviving co-owner.
Your brother would further be under no legal obligation to split the account’s assets with you, contrary to your mother’s last wishes.
When joint assets move to surviving tenants via operation of law, it becomes extremely difficult and costly for a losing party to take back a legitimate inheritance.
Co-Ownership Exposes Property to Creditors and Future Interests
Because a co-owner’s holding attaches to a tangible asset, the law allows a joint tenant’s creditors and his/her heirs to reach the co-owned property.
This means that co-owners may burden your jointly held property with mortgages, credit liens, or court judgments. A tenant’s ex-spouse or one of his/her children could further claim an interest in your co-owned property if the courts split his/her assets during divorce proceedings.
Case Example: You execute a 50/50 joint tenancy with your son on your $200,000 home, but he unfortunately loses his business in the latest recession. One of your son’s creditors thereafter places a $100,000 lien on your home after suing and receiving a favorable civil judgment against all property your son owns.
In the above example, the courts may force your son to sell his co-owned property share to pay the lien, leaving you with a mere $100,000 remaining interest—not enough for you to purchase a comparable home.
Joint Tenancy May Cause Loss of Medicaid Eligibility
Some seniors depend on state Medicaid benefits for covering their long-term healthcare costs after retiring (i.e. nursing home, assisted living center).
Current Medicaid eligibility rules in Iowa however affirm ordinary joint tenant property is an income asset where applicants always hold 100% equity.
The code further states joint tenancy-in-common (JTIC) executions are “gifting acts” that take five years to complete; a period that tenants-in-common must wait before reporting any dissevered asset equity on Medicare applications.
Holding a traditional joint tenancy after retirement may therefore compel individuals to sell their co-ownership interests (and spend the profits to pay for their long-term care) or force them to wait out a potentially lengthy vesting period before applying for Medicaid benefits.
Taking a Closer Look at Medicaid and Joint Tenancy
Damaging impacts to Medicaid eligibility is an unintended consequence of joint tenancy. Let’s consider how co-ownership adversely influences Medicaid benefits and examine how a frequently used estate planning tool may remedy the problem.
Case Example: Your father is showing signs of dementia and may soon require nursing home care. You know that dad won’t be able to afford his future healthcare expenses, so you’ll eventually want him to qualify for Medicaid benefits.
During a luncheon, your uncle Jack tells you that if you add your name to your dad’s lucrative certificate of deposit (CD) account, it will protect the asset from Medicaid rules and the property would avoid probate—should you do it?
Medicaid in Iowa will most likely pay for your dad’s nursing home care if he can’t afford it. But the program will not treat your father’s co-owned property the same when considering his eligibility.
If your dad holds the CD in joint tenancy with you with a right of survivorship, Medicaid will assume only one person owes the asset—your father.
Therefore, adding your name to your father’s CD does nothing to protect the property from Medicaid rules, even if you both were to keep the account open for five years.
The program does however offer your dad some relief. Medicaid regards joint tenant assets held in common as gifts that mature after five years of acquisition—once fully vested, the applicant would only own the actual equity interest in the co-owned property.
In this case, it may be beneficial for you to become a joint tenant with your father before he files for Medicaid benefits—it’s all about timing and choosing the right joint tenancy instrument to execute.
Medicaid Estate Planning Solutions
According to Uncle Jack, dad would not need to report his CD account to Medicaid if he gifts it to you in joint tenancy.
Uncle Jack would be wrong if dad executes a joint tenancy with rights of survivorship, since such co-ownership would allow dad to take back the money held in the CD unilaterally—he’d always enjoy a 100% ownership in the asset.
If your father however held a JTIC with you, he would relinquish complete control of some portion of the CD, and Medicaid would deem this gift completed after five-years when determining his eligibility:
Case Example: Your father owns a CD worth $100,000, property that makes him ineligible for Medicaid.
If dad adds you as a traditional joint tenant, he’ll still control the full $100,000—thus indefinitely disqualifying him from receiving benefits.
If however dad makes you a 50/50 JTIC, he’d legally relinquish $50,000 to you, and Medicaid would only count $50,000 (his part of the asset) when he applies for benefits five years later.
Play It Safe!
Joint ownership carries shortcomings that often produce harmful consequences. Always execute your joint tenancy probate-avoidance tools with extreme caution and never move forward without first having an estate lawyer enlighten you about the unforeseen risks that joint ownership may bring to you and your family.