Are joint tenant assets really safe from probate proceedings?
The Court of Appeals of Iowa says yes and no in an opinion handed down earlier this year—but let’s talk about that in a minute.
First, let’s explore whether joint tenancy is risk free and fully protects the surviving tenant’s ownership title.
The Ups and Downs of Co-Ownership
Joint tenancy with rights of survivorship has its advantages. Iowa probate law limits a creditors’ right to place liens against property co-owned among decedents and surviving joint tenants, which makes this estate planning tool an extremely popular choice among married couples.
A deceased spouse’s property interests will immediately transfer directly to the surviving spouse by operation of law—this sounds like an airtight conveyance with nothing to worry about when the estate enters probate… right?
- Death of all Co-Owners. Although unlikely to happen, property and assets owned in joint tenancy may pass through probate if both joint tenants pass away at the same time. This hypothesis provokes most surviving joint tenants to add a new co-owner immediately upon death of another joint tenant.
- New Co-Tenants Means New Creditors. When surviving joint tenants add other co-owners to property titles, they’re also establishing a relationship with the new tenants’ creditors who may try to claim the asset before it enters probate.
- Unwanted Co-Tenants. Using the scenario above, imagine you own a home with your sister who later files bankruptcy or gets divorced. Your sister’s creditors may end up co-owning the house with you, or worse, the brother-in-law who you can’t stand may become the next co-tenant.
- Joint Tenancy with Non-Spouses Disinherits Heirs. Surviving non-spouse ownership title in joint tenancy takes precedence over claims made by the decedent’s heirs. For example, a will may convey property to heirs, but if the asset was co-owned with the decedent’s relative, business partner or friend, the beneficiary often loses their right to inherit.
- Unconsented Transfer of Title. Co-owners may further attempt to transfer their interests in jointly held property to another individual without the other owner’s consent. Such an act often results in costly estate litigation to remove the improper title assignment.
- Probate Taxes and Fees. Even when co-owned assets pass directly to the surviving joint tenant upon death of another co-owner, the courts may still subject the property to probate fees and tax assessments, especially when the co-owner is a non-spouse. A probate judge may accordingly consider the right of survivorship transfer as a “gift” and add the property to the probate inventory for “gift tax” assessment and probate free appraisal—this recently occurred In The Matter of the Estate R.E. Siefkas (Iowa 2020) when in the Court of Appeals of Iowa ruled in January that assets held in joint tenancy are not completely free from certain assessments and review.
Probate Court Examines Bank Account Held in Joint Tenancy
When Robert Siefkas passed away in 2017, he left behind a bank account worth $190K that he owned jointly with his two sons, Michael and Steven.
The executor appraised the bank account and added it to the estate inventory despite Michael and Steven automatically receiving full title six month’s prior.
Steven and Michael split the cash balance evenly and closed the account during probate proceedings, but before the estate winded down, Michael asked the court to exclude the account’s value from the estate inventory.
Michael argued the executor erred when exposing the jointly held bank account to attorney fees and tax assessment. According to court records, Michael claimed the account was not an estate asset because his father had protected the cash balance from probate before he died by adding him and his brother as co-owners.
District Court Judge John D. Lloyd dismissed Michael’s claim, holding the executor “properly included [the asset] on the inventory form and included the account in analyzing reasonable [probate] fees.”
Court of Appeals Takes a Second Look
Judge Mullins from the Iowa Court of Appeals agreed that Michael’s joint tenancy bank account held rights of survivorship between the father and his two sons and that it was not an estate asset under the Roehlke Doctrine of 1975.
The court’s long-standing precedent In re Estate of Kiel (Iowa 1984) further holds “joint tenancy property passes by operation of law to the other joint tenant when one joint tenant dies,” Mullins pointed out, and that such property “is not divisible by the will. [and] not a part of the estate.”
It’s therefore “clear the joint tenancy bank account was not an estate asset,” the Court affirmed, and “the property belongs solely to Michael and Steven” of which cannot be divided among heirs.
However, Iowa Admin. Code r. 701-86.1 states all assets or interests in property held in joint tenancy are not part of the decedent’s probate estate but are includable in the “gross estate” for inheritance tax assessment, according to Mullins.
Appeals Court Affirms Executors Can Assess Fees and Taxes on Joint Tenant Property
The Court subsequently held Judge Lloyd was correct in allowing the executor to list Michael’s jointly held bank account on the probate inventory form in compliance with Iowa Code §633.361(12).
Judge Mullins further noted that Iowa Code §633.197-198 allows personal representatives to collect reasonable fees from a percentage of “the gross assets of the estate listed in the probate inventory” to compensate them for administrative work and that the Supreme Court of Iowa upheld such practice when deciding In re Estate of Martin (Iowa 2006).
So even though none of Michael’s relatives could touch the $192,000 in co-owned assets, Michael still had to pay an inheritance tax and shell out $3840 (2% in admin fees) to the attorney who settled his father’s estate.
When revisiting our original question—are assets held in joint tenancy really safe from probate proceedings?—we understand now that the answer is not so simple.
The right of survivorship absolutely has more perks than fails, but let’s add one more concern on the topic before we go… the co-owner’s right to destroy joint tenancy before death.
Husband Attempts to End Joint Tenancy
Mr. and Mrs. Johnson purchased their homestead in joint tenancy after getting married. Thirty-five years later, the wife took ill and assigned power of attorney to her daughters, who immediately transferred their mother’s interest in the homestead to their dad via quitclaim deed.
Mr. Johnson subsequently passed away before his wife, who later sued to have her joint tenant rights reinstated. The lower court held court Mr. Johnson effectively destroyed the joint tenancy after conveying his interest to himself in the new deed.
The court further affirmed the law allows a joint tenant to end co-ownership when the result produces a tenancy-in-common with the other owner—thus allowing for claimants like Mrs. Johnson to continue enjoying full possession of their property rights until death.
When checking whether Mr. Johnson lawfully severed his joint tenancy, the Supreme Court of Iowa said—not so fast!
Justice M. Cady compared Mr. Johnson’s “intent-to-sever” co-ownership with holdings found In re Baker’s Estate (Iowa 1956). Luckily for Mrs. Johnson, her husband’s execution of the quitclaim deed was not a legally sufficient instrument to establish an “intent-to-sever joint tenancy” of the homestead, according to the Court.
What makes this case so important?
Well… prior to hearing In re Estate of Johnson (2007), the Iowa courts had never formally or expressly adopted a method for determining severance of joint tenancies in Iowa.
We know now that probate judges will use the intent-based approach found in the Johnson Doctrine moving forward—but let’s examine this topic in a future blog post.