Business partners and couples who wish to share ownership in an asset may designate it as joint tenants with right-of-survivory, or JTWROS. This option allows assets to be passed directly to the surviving owners in the event of the death of one owner. JTWROS has its limitations. If you want to avoid probate (which can be time-consuming and court-supervised if one of your owners dies), there are other options.
What does it mean to be joint tenants with the right of survivorship?
Joint tenants with right to survivorship are legal terms that describe a way to jointly own assets. This is where more than one party has equal rights and ownership over an account or real property. The asset automatically becomes the property of the surviving owner if one owner dies.
What accounts are JTWROS-compatible?
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Real estate. A JTWROS designation can be given to real estate properties, including land and houses. It is important to remember that mortgages and loans on the property are the responsibility of the surviving owners after one of them dies.
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Bank accounts. JTWROS accounts are available for checking and savings accounts. The account is closed if one of the joint owners passes away.
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Brokerage accounts. Note that, much like a mortgage or loan against real estate, a margin loan is an account where the owner(s) who survive is responsible for the repayment of the loan.
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Personal property. Personal property can be used to move and is not permanently fixed, like a house. JTWROS personal property is typically a vehicle but could also include artwork, collectibles, or other assets with monetary value.
Can my retirement fund be JTWROS
Generally, no. You cannot jointly own 401(k), IRAs, or Roth IRAs. These assets can be kept in probate by adding beneficiaries to them.
Benefits of joint tenants with the right to survivorship
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Avoid probate. When an owner dies assets are transferred to the beneficiaries without going through the lengthy probate process. This can take up to months.
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Continuity. The probate court can freeze assets of a deceased person until it determines the new owner. Assets that are JTWROS assets may be transferred immediately. The surviving owners do not have to wait for the estate to close before they can move into a house or access an account to pay their expenses.
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Ownership and responsibility share. JTWROS accounts have multiple owners. However, they also share all liabilities (mortgages or loans). The account is also subject to liabilities. As they would also be responsible for any liabilities, this shared responsibility allows owners to act in the common interest.
Advantages of joint tenants with right to survivorship
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Relationship with the joint owner. Each owner is entitled to full ownership, which gives them unlimited access to the assets. JTWROS accounts that involve real estate might require all owners consent to the sale of the property.
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Frozen bank account. The probate court may be able to freeze bank accounts until the estate has been settled. This is usually only done if the deceased was in a lot of debt. The court might need to pay creditors before the estate can be settled.
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The remaining owners have the power to make changes and decide who gets the assets. If you die first, your JTWROS account could mean you lose control over what happens to your assets.
What tax implications does JTWROS have?
JTWROS accounts are able to help avoid probate but they may still be subject federal gift tax rules and estate taxes. The tax laws surrounding JTWROS accounts differ depending on whether joint account owners are married.
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For spouses: JTWROS assets may be eligible for a step-up in cost basis if either spouse dies. You can only step up half the asset’s full value, however this can reduce capital gains taxes. The 50% step-up is the amount that was owned by the joint owners who died. This step-up is not a complete one and can lead to additional taxes when the property sells.
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Nonspouses: A death of one owner can result in an asset transfer, which the IRS considers to be a gift. For smaller accounts, the annual gift tax exclusion may apply ($17,000 in 2023), while for larger amounts, the IRS might require you to file a gift return. Nonspouses who own real estate such as JTWROS are usually considered to be the first to die. This could adversely affect estate taxes if the estate is large enough.
Other options to share ownership
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In that it can be used to purchase real estate and financial accounts, tenants in common are similar to JTWROS. If one of the joint owners passes away, the deceased owner’s share will pass to their beneficiaries and not to the surviving owners. Accounts that are owned by tenants in common do not automatically avoid probate because the deceased’s shares remain part of the estate.
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Because the beneficiary does not have any ownership rights until the death of the original owner, transfer on death accounts, or TOD accounts, are different than JTWROS accounts or tenants in common accounts. ToD accounts are exempt from probate because the assets are transferred immediately.