Pitfalls of Joint Ownership
Many people approach estate planning with a simple solution without realizing all of the ramifications. They place the name of an adult child on their bank accounts and sometimes even on the title to their homes. They reason that if they become disabled this child will be able to pay their bills and otherwise conduct their personal business. In the event of their death this child can be relied on to distribute cash and other assets to the other siblings fairly and the property will avoid probate. This approach may appear brilliant, yet unintended consequences may easily overshadow your original motives and good intentions. Careless titling of assets can jeopardize your property, your finances and your estate plan.
Types of Joint Ownership
Joint ownership may be applied to personal property, such as bank accounts or automobiles. It may also be applied to real property. There are three types of joint ownership:
- Joint tenants with rights of survivorship
- Tenants in common
- Tenants by the entireties
Joint tenants with rights of survivorship mean that when one joint owner dies, his or her interest passes automatically to the surviving joint owner(s), not to the decedent’s estate. Ownership transfers outside of probate. When two or more people own property as tenants in common the property does not automatically go to the surviving joint tenants on death. Rather, it gives each owner an undivided interest in the property. When a joint owner dies, his or her interest in the property goes to his or her estate. For example, if Bill and Mary own a home as joint tenants with rights of survivorship, upon Bill’s death the entire home becomes the property of Mary by operation of law. There is a different result if Bill and Mary own the home as tenants in common. Upon Bill’s death his interest in the home would go to his estate and be distributed either by the terms of his Will or as determined by the Probate Court. With joint tenants with rights of survivorship, each joint tenant must own an equal share with all other joint tenants. The tenancy in common permits co-owners to own different percentages.
Tenancy by the entirety is a property interest created when a husband and wife jointly own property. It is largely treated the same as joint tenants with rights of survivorship. The interest of the deceased spouse in any property automatically passes to the surviving spouse. However, unlike other forms of joint tenancy, tenancy by the entirety affords creditor protection. A creditor of only one spouse has no claim against property owned by husband and wife and cannot force the sale of any property owned by both husband and wife as long as both spouses are alive and the marriage is intact.
Benefits of Joint Tenancy
Property that is held as joint tenants with rights of survivorship is often used as a simple means to avoid the probate process. The joint owner inherits the property immediately. Generally, only a death certificate is needed to further deal with the property. For example, Sam is 80 years old and has a savings account. He adds his daughter, Jane, to the account as joint tenant with rights of survivorship. If Sam is the first to die, the entire account will automatically belong to Jane and so avoid the probate process on Sam’s death. For small or moderate estates, joint ownership may afford a convenient and economical way to pass title to the particular property. In certain circumstances it may be advantageous for property located in another state to be owned in joint names with rights of survivorship. This way, upon the death of the joint tenant, the survivor will own the property outright and the need for probate in the other state will be avoided.
By causing property to pass outside of probate, it will be insulated from later claims by Medicaid for reimbursement of benefits paid. For example, if Sam were in a nursing home and receiving Medicaid, his bank account could have no more than $2,000 in it. Let’s assume he added his daughter’s name to his home five (5) years prior to needing nursing home care. On his death, the small bank account and his home will pass directly to Jane without the need for probate and without being subject to a Medicaid lien.
Any joint holder can write checks on a jointly-held bank account, even after the death or disability of a joint owner. This means that a joint owner would be able to access your account without having to go to the probate court to obtain a conservatorship for authority to handle your affairs. Funds are immediately available in the event you die or become incapacitated.
Real property held as tenant by the entirety (available only to a married couple) can be protected from creditor claims of one spouse.
Pitfalls of Joint Tenancy
For most people, the disadvantages of joint tenancy far exceed any advantages. Some of the pitfalls of joint tenancy are:
Probate is at best delayed, not totally avoided. Joint tenancy does not avoid probate but rather postpones it until the death of the surviving joint owner. There are no provisions for the disposition of the property upon the death of the survivor. In addition, the joint tenant who is intended to be the survivor may die first, frustrating the intent of the parties. For example, let’s assume Sam and Ann, a married couple, own their home as joint tenants. Sam becomes ill and goes into a nursing home. If Ann dies before Sam, the home passes by survivorship to Sam. On Sam’s death, the entire home becomes part of Sam’s probate estate and is subject to a Medicaid lien for any benefits paid on his behalf.
Property may pass to unintended heirs. When property is held jointly, there is no way of ensuring that your property will pass to whom you want after your death. No matter what you do, joint property passes to the surviving joint owner to the exclusion of everyone else. For example, if your intent is to leave your property to your spouse and then to your children, joint tenancy may not be the right option. Let’s assume Bob and Mary are married and own their property jointly. If Bob passes first, all of the assets pass to Mary automatically and avoid probate. Mary remarries. If she and her new husband, John, decide to own their property jointly, her assets will automatically pass to John if she predeceases him. The result is that she will have unintentionally disinherited her children. This may be good news for John and John’s children but catastrophic for Bob and Mary’s children. John has no obligations to Mary’s children and may choose to forego some or all of Mary’s children after her death and against her wishes.
Another common example involves an elderly parent who transfers her bank account into joint tenancy with only one of her children. She may well think she is adding the child for convenience purposes in the event of a catastrophe or she needs help managing her finances. She may even believe that the child will “do the right thing” and share the funds in the account with the other siblings on her death. Almost invariably the elderly parent does not document her intention in writing. On her death, the child becomes the sole owner of the account and has no obligation to share the account with his or her siblings. If this was the only account, then the child would end up with the lion’s share of the estate with little or nothing going to the other children.
In addition, any non-spouse joint tenant can “sever” the joint tenancy, converting it to a tenancy in common. This means that a joint owner can sell or give away their interest in the joint property without notice to or consent of the other joint tenants. Under a tenancy in common, each owner can transfer or will his or her property interest to anyone. The unintended result is that you may end up jointly owning property with someone not of your choosing.
Property is at risk to creditors and other unintended consequences. Most people do not realize that a child’s creditors can attach any property or assets that the child owns jointly, regardless of whether the child contributed to any part of the joint property. When you add another person to a title, you tie yourself to the new owner’s personal and financial liabilities. For example, if June puts her children on the deed to her home, she has subjected her home to her children’s creditors, bankruptcies, marriages, and life decisions. Her home could be taken from her if a child is sued due to an automobile accident, outstanding debt or other matter. Because of the joint ownership, her children are entitled to move in, sell their share without June’s knowledge, much less her permission, or file an action to partition the property and thereby force a sale of the home. If a child dies, his or her spouse may have a claim against the child’s share. Likewise, if a child divorces, the property is considered a marital asset and can be subject to a property settlement agreement.
In addition, let’s assume June puts her daughter, Sally, on her bank account for convenience purposes with the understanding that Sally distributes an equal share of the account to her siblings upon June’s death. Sally now has total access to her money regardless of June’s intent. She could easily drain June’s bank accounts. No one ever thinks this will happen, but the unfortunate truth is that it has occurred. Upon June’s death, the account becomes the full property of Sally. While Sally may have a moral obligation to make distributions to her brothers and sisters she is under no legal obligation to do so. As a result, substantial difficulties in the family and possible costly litigation can arise which was not June’s intent.
June could have accomplished her purpose by adding Sally on the account as a signatory without ownership rights or by granting a power of attorney that authorizes Sally to act on her behalf. If Sally were to be sued, file bankruptcy or divorce, the assets wouldn’t be at risk because she is not an owner of the asset(s). And while adding a joint owner is relatively easy, it is not so easy to remove a name once it is added. If June later changes her mind, she cannot remove Sally’s name without his or her permission.
Unintended Tax Consequences. Creation of a joint ownership may have negative tax consequences in certain circumstances. In the example above, June gave Sally a one-half interest in her bank account. Even though June may be the only one who actually uses the asset, she has made a completed gift to Sally, which is subject to Federal Gift Taxes. These gift taxes need to be reported on June’s federal tax return and, in some cases, a gift tax may have to be paid. On June’s death, Sally inherits the property outright. Although under no legal obligation to do so, if Sally makes any distributions to her brothers and sisters, she will have made a gift. Gifts in excess of $13,000 a year per donee are subject to gift taxes. One million dollars can be passed to others during one’s lifetime as gifts. Distributions in excess of $13,000 to each of Sally’s siblings will either be subject to a tax of up to 55% or will have to be deducted from Sally’s estate and gift tax exemption amounts. In some instances, the amounts in question are safely under these limits. But, in other cases, this arrangement can provide significant and unintended adverse tax consequences to the child who was placed as a joint owner on the parent’s assets.
Another tax consequence of joint ownership is the adverse impact on capital gains. Capital gains are taxes imposed on the appreciation of certain property. The amount of the tax depends on one’s tax bracket and the amount of time the investment was held before being sold. When one buys a “capital asset” their purchase price is that asset’s “basis.” When you sell property, you must pay a capital gains tax on the difference between what you paid for the property (plus improvements) and what you receive for it.
The estate tax law provides a significant exemption in calculating capital gains on appreciated property which is part of an estate. When one passes away their heirs receive a “step-up” in basis. The tax basis for the heirs is the value of the property on the date of death – not on the date the property was acquired. For example, let’s assume Tom purchased his house for $15,000 in 1960. In 2010, he adds his children, Bobby and Sue, to his home as joint tenants. Since the house is not the children’s principal residence, Bobby and Sue would have the same basis ($15,000) as Tom. If the home was subsequently sold for $300,000 after Tom’s death, Bobby and Sue would owe capital gains tax on $285,000. If the children received the home through Tom’s estate, the basis is “stepped-up,” or increased, to the fair market value on the date of death. In that instance, if Bobby and Sue sold the house they would pay little or no capital gains tax.
Lastly, joint ownership of property could subject all of the assets of a married couple to federal and/or state estate taxes. For example, Jack and Barbara have a large estate. All of their assets are titled jointly. At Jack’s passing, all of the assets pass to Barbara automatically and avoid probate at Jack’s death. Now Barbara owns all of the assets in her name solely. At her death, all of the couple’s assets will be subject to probate proceedings. However, joint ownership of all of their assets will likely subject their family to estate taxes that could easily have been avoided. This is because when Jack died he did not have any individually owned assets to fund his estate tax exemption amounts. His exemptions are wasted. When Mary dies, her exemption may well be insufficient to protect both her share of the assets and those received from Jack. The amount in excess of her exemption amount will be subject to estate tax (federal rates range from 37% to 55%).
Although many people are concerned about avoiding probate, joint ownership of assets is generally not the way to do so. Joint ownership can often lead to undesirable and unintended consequences. It is important to consult with an experienced professional for your estate planning needs to ensure that you have properly taken care of your legal and financial affairs.
THE LAW OFFICE OF STEPHANIE KONARSKI
36 North Bedford Street, East Bridgewater, MA 02333
Phone: (508) 350-0120 Fax: (508) 350-0121
Email: stephanie@konarskilaw.com
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