Estate planners often tout the virtues of owning property jointly — and with good reason. Joint ownership generally offers several advantages for surviving family members. But this shouldn’t be viewed as a panacea for every estate planning concern. You must also be aware of all the implications.

Title Wording Matters

Joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.

From a legal standpoint, there are two main options for married couples. The first is joint tenants with rights of survivorship (JTWROS). This is the most common form and often is used for a personal residence or other real estate. With JTWROS, either spouse has survivorship rights in the event of the death of the other spouse. The property is subject to the reach of creditors of all owners.

The second is tenancy by the entirety (TBE). In this case, one owner can’t sell their share of the property without the other joining in. But TBE offers more protection from creditors in noncommunity property states if only one spouse is liable for the debt. Currently, a TBE is available in slightly more than half the states.

For co-owners who are married to each other, property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. In certain, rare situations, married couples may opt to be tenants in common.

Pluses and Minuses

The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as intrusive. Jointly owned property, however, simply passes to the surviving owner.

Although joint ownership is a convenient and inexpensive way to establish ownership rights, there are also drawbacks. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. (Comparable rules may also apply on the state level.)

If parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed his or her own property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person actually makes a withdrawal.

For smaller gifts, the gift tax liability may be covered by the annual gift tax exclusion ($15,000 per recipient in 2021). If the gift exceeds the exclusion amount, it can be sheltered from gift tax by the gift and estate tax exemption ($11.7 million in 2021). However, doing so will erode the remaining estate tax shelter.

Note that property that avoids probate may still be included in your taxable estate. To avoid both probate and estate tax, you must relinquish all interests in the property — including ownership and control over assets and benefits. Joint ownership doesn’t meet these requirements.

Tax Repercussions

You also need to be aware of possible tax repercussions. For estate tax purposes, if spouses own property as JTWROS and one spouse passes away, the value of the deceased’s half of the property is currently “stepped up” to the fair market value on the date of death. There is no step-up on the other half at that time. Contrast that to the result if the property had been owned 100% by the deceased spouse, in which case it could be eligible for a step- up to the full fair market value at that time.

When property is owned jointly with someone other than a spouse, the entire property is included in the estate of the first to die, unless the other owner can show that he or she contributed enough to acquire a share of the property. This can have adverse estate tax consequences.

Finally, a survivor of jointly owned property maintains complete ownership rights. Therefore, property could end up outside the family due to a second marriage. For example, the children of a second spouse might subsequently inherit the property. Such a scenario may defeat the intentions of the original owner.

Not Always Appropriate

Although joint ownership can be a useful estate planning tool, it isn’t appropriate in all circumstances. Talk with your estate planning advisor to determine whether it works given your unique goals and situation.