People often consider adding a spouse or family member to their bank account or real estate as a form of estate planning. Joint property ownership is easy to set up. It can be established at the bank when opening an account, through the title company when buying real estate, or by adding someone’s name to investment accounts. In creating the joint ownership, many think that they have an easy way for the asset to automatically pass to the named joint owner at the death of the other owner, without having to go through probate.

While this may seem like an attractive option for succession planning, joint ownership also has the potential to cause disastrous unintended consequences and complications. Consider some of these important facts before adding someone as a joint owner to an account or piece of property.

The other joint owner’s debts may become your problem.
Any debt or obligation incurred by the other joint owner could affect you. If the joint owner files bankruptcy, has a tax lien, or has a judgment against them, you could end up with a new co-owner—your old co-owner’s creditors! For example, if you add your adult child to the deed on your home and they have debt you do not know about, your property could be seized to collect that debt. Although “your” equity of the property will not necessarily be taken, that is little relief when your home is put on the auction block!

Your property could end up going to someone you did not intend.
Blended family structures can result in situations that can be difficult or impossible to navigate when someone dies. If you own your property jointly with your spouse and you die, your spouse gets the property. That may seem like what you intended, but what if your surviving spouse remarries? Your home could become shared between your spouse and their next spouse. This gets especially complicated if there are children involved. Your property could conceivably go to the children of your spouse’s next marriage rather than, or in addition to, your own children. 

You could accidentally disinherit family members.
If you designate someone as a joint owner and you die, you cannot control what they do with your property after your death. Perhaps you and your adult child co-owned a business. You may state in your will that the business should be equally shared with your spouse or divided between all your kids. However, the rights of joint owners take priority over the terms of your will, meaning the joint owner will now have full ownership and control over the property.

You could have difficulty selling or refinancing your home.
With joint ownership, all joint owners must sign off on a property sale. If your other joint owner disagrees with your desire to sell, you may be prevented from moving forward. Court action may be necessary to force the sale of the property. If your joint owner becomes incapacitated and is unable to manage their affairs because of an accident or illness, if they do not have proper planning in place, you may have to go to court to have a guardian or conservator appointed to represent the joint owner’s interest in the sale. Even if you and your joint owner always worked together to make decisions, the appointed conservator may not agree with your desired actions and may keep you from doing what you see as appropriate.

You might trigger unnecessary capital gains taxes.
When you sell a home for more than you paid for it, you usually pay capital gains taxes based on the increase in value. Therefore, if you make your adult child a joint owner of your property and you sell the property, you are both potentially responsible for the resulting taxes. Your adult child may be unable to afford the tax bill triggered by years of appreciation.

On the other hand, beneficiaries who inherit property at the owner’s death only pay capital gains taxes if and when they decide to sell the property. These taxes are based on the increase in value from the date of the owner’s death, not from the day the original owner first acquired it. Passing the property through your will or trust rather than naming your loved one as joint owner could save them a fortune in income tax. Most Americans are not subject to estate tax because of the large estate tax exemption that is currently available. However, income and capital gains tax can hit almost anyone.

You could cause your unmarried partner to have to pay a gift tax.
If you add your unmarried partner as the joint owner of your home, the IRS will consider that transfer of ownership to be a taxable gift to your partner. Unnecessary issues may be created, as well as possible exposure to gift taxes.

Let us help.
So what can you do? These decisions are too important and complex to work through without the support of someone who routinely works in this area and understands the implications of joint ownership. Schedule time with us and let us assist you in planning to reduce estate taxes, avoid potential legal pitfalls, and set up a plan to protect your loved ones. We understand not only the legal issues but also the complex relationships that can be involved in estate planning. We will listen to your concerns and help you develop a plan that gives you peace of mind while achieving your goals for your family. Contact us today for a consultation.