Joint Tenancy – A Potential Disaster

I have written about joint tenancy before, but it comes up so often in my practice, it is worth discussing again.

For most personal transactions, people do not consult their lawyers.  Instead, they rely on advice and information from other professionals such as real estate brokers, financial planners, bankers, etc.  When I ask most clients how they hold title to their property, they don’t know.  It is something they should know, as title has many legal consequences.

Regarding the purchase of a home by a husband and wife, there is a simple option that is used infrequently that can provide significant benefits.  That option is owning the residence as tenants by the entirety.  Most deeds that I see from title companies have a husband and wife taking title as "joint tenants with rights of survivorship" ("joint tenants").  This form of ownership results in the husband and wife owning the property equally (unless otherwise specified) and further provides that the home will automatically pass to the surviving spouse upon the death of the first spouse.

Assuming that joint tenancy is a proper choice for the couple (see discussion below), it is almost never the best option.  In my opinion, a husband and wife should almost never hold title to their residence as joint tenants.  Why?  Because owning the home as tenants by the entirety is almost exactly the same as joint tenancy but with one significant advantage.  Under Illinois law, if a home is held as tenants by the entirety, a creditor cannot force the sale of the home to pay a debt of just one spouse.

For example, assume that husband and wife own their home as tenants by the entirety and that husband has a gambling problem or is in a car accident or is a doctor who is sued for malpractice, and that a creditor obtains a judgement against husband.  That creditor cannot force the home to be sold to pay the husband's debt.  A creditor can only force the home to be sold to pay a debt if both husband and wife are liable on the debt.  For example, if husband and wife jointly borrow money, then the home can be used to satisfy that debt.  The one major exception for creditors is, as always, the Internal Revenue Service.  The IRS can seize a home held as tenants by the entirety for the tax debt of only one spouse.

Not all states have tenancy by the entireties, and there are differences between the laws of various states.  In Illinois, in order to validly hold title as tenants by the entireties, (1) two people must be married (or in a civil union), (2) the deed must identify them as married and that they are taking title as tenants by the entireties, (3) the property must be their homestead residence (not a second home or rental property), and (4) both parties must live in the residence.  If one or both spouses moves out of the residence, the spouses divorce or one spouse dies, the home is no longer held as tenants by the entirety even though the deed still says that it is.

If a husband and wife currently own their homestead residence as joint tenants, they can reconvey it to themselves as tenants by the entirety and obtain the creditor protection benefits.  However, they will not obtain the benefits "if the property was transferred into tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor's ability to pay those debts as they become due."  That means you cannot wait until one party already has a debt he or she cannot pay to make the transfer.

One further difference between joint tenancy and tenancy by the entireties is that in joint tenancy, one spouse can transfer his or her interest in the property.  With tenancy by the entireties, any interest in the home cannot be sold, given away, etc., without the signature of both spouses.

Now I would like to address joint tenancy in general.  It seems this is the default designation for real property, bank accounts, brokerage accounts, etc., and often it may be the appropriate choice.  However, no two people (whether husband and wife, parent and child, or anyone else) should take title to property as joint tenants with rights of survivorship without completely understanding what that means.

Any property held as joint tenants with rights of survivorship has two significant legal consequences.  The first is that both parties have full rights and access to the entire property.  For a bank account, this means that either party can legally withdraw the entire account.  It also means that the creditors of either party can use the property to satisfy a debt.  For a husband and wife, this may be the desired result.  For a parent and child, it may not.

The second significant consequence is that at the death of the first party, the property automatically passes by law to the surviving party, separate and apart from any will or trust agreement.  Again, for husband and wife, this may be acceptable, but it may not.  For example, if husband and wife have trusts under their will for tax purposes, the joint tenancy property cannot be used to fund those trusts.  Or, if husband and wife do not leave their property to the same people under their wills, joint tenancy may not be the right choice.  For example, assume husband and wife each have children from a previous marriage.  Wife's will says that her property goes to her children.  Any assets she owns as joint tenants with her husband will pass to him and not her children as specified in her will.  Or, assume her will provides that all of her property goes into a trust.  Husband receives the income for his lifetime, but what is left when he dies passes to wife's children.  Again, property held as joint tenants with husband will not pass under the will but will instead go outright to the husband.  He may or may not then leave that property to wife's children at his death.

The same analysis applies with children.  It is common for a parent to add a child's name to a bank account, particularly when the parent is older and wants some help paying the bills, etc.  If that child is added to the account as a joint tenant, that account will pass to the child at the parent's death regardless of any will.  That child may or may not share that account with his siblings.  Or, he may or may not use it to pay funeral expenses, even if that was the parent's intention.  The solution?  Add the child to the account as a "convenience signer" and not as a joint tenant.  That means the child can sign checks, but the account will not pass to him at the parent's death.

Bottom line:  Don't automatically title your property as joint tenants.  Explore your options and talk to your lawyer or accountant if you have questions.