One of the most common lifetime estate tax planning devices involves the severing of joint tenancy arrangements. A joint tenancy is a form of property ownership in which at least two owners hold title to property as joint tenants with rights of survivorship, meaning that the last surviving joint tenant will become the full owner of the property. People often enter into joint tenancy arrangements without really thinking about it; someone else, like a real estate title clerk, decides for them simply by innocently typing the deed to reflect joint tenancy. The good thing about joint tenancy is that it is simple and at least avoids probate in the estate of the first joint tenant to die.
However, joint tenancy can ruin the estate planning of the first joint tenant to die by operation of law. This can be crucial to estate planning for a blended family because the property automatically passes to the surviving joint tenant upon the death of the first joint tenant to die. In the context of a blended family, this almost always means that the children and other loved ones of the deceased joint tenant will get nothing with respect to that property, which almost always conflicts with the intentions of the deceased joint tenant. What is in that deceased joint tenant’s will, or, worse yet, what the deceased joint tenant intended, sadly is irrelevant.
The estate tax consequences of a joint tenancy differ depending upon the identity of the joint tenants. If a husband and wife are the joint tenants, then there will be no estate tax as to that property on the death of the first joint tenant to die because of the unlimited marital deduction. However, if anyone but spouses are joint tenants, like, for example, a parent and a child, the estate tax consequences depend on who actually paid for the property. Consider an example: a mother and daughter are joint tenants on property that the mother actually paid for. At the mother’s death, all of the value of the property will be included in the mother’s estate because the mother purchased the property with her money. Even if spouses are the joint tenants, joint tenancy may cost the estate of the first spouse to die its use of the full estate tax exemption by overfunding what goes outright to the surviving spouse.
I rarely ever recommended that couples, particularly those in blended family relationships, own property as joint tenants. An estate planner who represents both partners may have an ethical problem with recommending severance of a joint tenancy arrangement. This is because severing a joint tenancy may actually work to the detriment of a younger spouse, particularly one who is less wealthy than the other spouse, who would likely survive and get all of the property. This is clearly an area of potential conflict. Nevertheless, I always recommended severance anyway, reasoning that since you never really knew who would survive (I’ve been fooled too many times), the parties were in the same boat at that time.
The beauty of severing a joint tenancy is that one co-owner can do it unilaterally without the other co-owner having to approve the change or even know about it. Again, this is a reason to have separate representation, because a lawyer may be hamstrung by ethical obligations to the other co-owner and unable to participate in severance without telling the other co-owner (except in the rare circumstance where the lawyer represents each of them separately) if the estate planner represents parties.