Joint ownership does not always simplify life financially.
Various assets can be jointly owned.
These include real estate, bank accounts, and investments.
While estate planning and probate avoidance are common reasons for utilizing joint ownership, this option can create unnecessary financial risks.
Common issues arising from jointly owned property include tax liabilities, financial disputes, and legal challenges.
Little wonder we refer to joint tenancy as "legal dynamite" in our estate planning practice.
Used prudently, it can be a blessing.
Used imprudently, it can be a curse.
Although joint ownership can be beneficial in some circumstances, understanding its risks can help create an estate plan that suits your needs and goals.
Joint ownership can be risky.
Joint ownership occurs when two or more individuals legally share ownership of an asset.
Property can be jointly owner in a variety of ways.
These different forms of ownership have distinct financial and estate planning consequences.
What types of joint ownership exist?
Joint Tenancy with Right of Survivorship (JTWROS)
After one of the owners under JTWROS dies, then the surviving owner will automatically inherit the asset.
This type of joint ownership is common with married couples.
Tenancy in Common
With Tenancy in Common, owners hold a specific property share.
When one of the owners dies, his or her share can be passed to heirs through a last will and testament.
The shared does not transfer automatically to the remaining co-owners.
Tenancy by the Entirety
Some states offer Tenancy by the Entirety joint ownership.
This type is available to spouses and can provide some protection from creditors.
Joint Ownership of Bank Accounts
When bank accounts are jointly owned, all the owners have complete access to the money.
This is true even if only one owner contributes all the funds.
Although these various forms of joint ownership may seem like simple and beneficial solutions, they can lead to unintended legal and financial consequences.
When an additional owner is added to an asset, the original owner no longer has sole authority to make decisions about the asset.
If an account or other property is jointly owned, permission must be given by the other owner for any significant financial decisions or sale of the property.
With bank or investment accounts, the other person can take action or withdraw funds without your agreement, consent, or knowledge.
If you have specific ways you want the asset handled in your estate plan, the other person may refuse to cooperate.
While many parents may think adding an adult child to their house deed will help with the transfer when they die, the parents will be unable to refinance or sell the home without approval from the child.
Additionally, if the relationship sours, legal battles can be triggered.
Yikes!
Joint ownership can be a risky move if the person you have added gets a divorce, is sued, or has debt.
Why?
Creditors can make claims on jointly owned assets.
Consequently, judgments or liens can be made against your property.
Your jointly owned assets could be subject to division in a divorce settlement or seizure by creditors.
Essentially, you may lose control or ownership of your assets because someone else made financial missteps.
If your relative or child has unstable financial or creditor issues, making one of these individuals a joint owner is likely not worth the risk.
Taxes can also be complicated by joint ownership.
What are common tax issues?
Rather than benefiting from receiving a step-up in basis on the value of the asset at your time of death, your heirs will have to pay capital gains taxes on the appreciation from the time you purchased the property or investment to when they sell it.
If the item had been transferred after death rather than through your heirs being included on the property while you were alive, then there would have been significant tax savings.
Because adding a joint owner to an account can be considered a taxable gift, reporting may be required if the amount exceeds the annual gift tax exemption threshold.
Making choices about ownership without working with an experienced estate planning attorney can lead to higher tax bills.
Avoiding probate is a common reason cited for joint ownership.
Without careful and strategic planning, this strategy can backfire.
It is possible to unintentionally disinherit beneficiaries.
If one joint owner survives, all ownership may transfer to this person despite contradictory last will and testament provisions.
When multiple assets are owned jointly by different people, some heirs may inherit more than others regardless of your intentions.
When joint ownership contradicts your last will and testament, family members may contest distribution in the courts.
Rather than prioritizing jointly owning property, it can be wiser to utilize beneficiary designations and trusts.
Although jointly owning property is risky, there are some instances where it may be beneficial.
If you want someone to have full rights to an asset and you trust them completely, then joint ownership may be helpful.
When an asset has no tax consequence and minimal value, it can be acceptable to add another owner.
Lastly, if both parties equally contribute to the asset, then joint ownership makes sense.
For the majority of assets, transfer-on-death deeds, payable-on-death accounts, and trusts grant greater controls and protections.
While jointly owning property may seem simple, it can lead to substantial future problems.
Prior to adding a loved one to an account, you should carefully consider the tax, financial, and legal consequences of this action.
Working with an experienced estate planning attorney can help you utilize strategies to best protect and preserve your assets.
If you do not have a comprehensive estate plan in place, you can request a consultation with our Overland Park estate planning law firm.
You relinquish complete control over the asset by adding other owners to assets.
The other owner may take actions you do not want or block actions you want to take.
If the other asset owner faces divorce, debts, or lawsuits, your property could be seized or entangled in legal action.
Because capital gains taxes, loss of step-up in basis, and gifting rules can all be impacted by joint ownerships, you could trigger unintentional tax consequences.
Because joint ownership supersedes other estate planning documents, the joint owner could receive the asset even if this individual is not your intended heir.
Joint ownership is not the only estate planning tool available for probate avoidance.
Payable-on-death accounts, beneficiary designations, and trusts fulfill this goal while providing more substantial protections and controls.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: Investopedia (March 02, 2024) "Joint Tenancy: Benefits and Pitfalls"
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