Fixing Problems With Joint Property Ownership
Many individuals seek to avoid probate court by titling assets jointly with a spouse or child and simply instructing that person to “share” the assets with other family members. While in theory it seems as though this method should be efficient, in practice it presents myriad problems. What people generally do not realize is that once a person becomes a joint owner of an asset, he or she (or any of their creditors) has the power to either follow or ignore the original owner’s wishes. Provisions in a will or trust generally will not trump joint ownership.
Listed below are some potential pitfalls with the use of joint ownership to attempt to avoid probate:
- Bank accounts — Joint tenants of bank accounts have unlimited access to every penny in a joint account. Even a trusted and responsible child can suffer financial loss, a medical emergency, divorce or other setback that may tempt him or her to borrow from “your” funds. Bank accounts can also be garnished by the joint owner’s creditors to pay for such things as a child support arrearage.
- Brokerage accounts — Joint tenants of brokerage accounts also have unlimited access to every penny in the account. The funds are potentially available to creditors of the joint tenants, and there may be gift tax issues as discussed below.
- Creditors — In the event a litigation claim is filed and a judgment received against the other joint owner, all money in a joint account may be available to creditors, regardless of whose money it really is.
- Divorce — A joint owner’s spouse in a divorce may attempt to claim a share of joint property as a marital asset.
- Real estate — The consent of all joint owners must be obtained before real property may be sold or mortgaged. Older homeowners may lose special benefits such as property tax advantages and low interest or interest-free loans for home improvements. Further, any creditors of either joint owner may be able to make a successful claim against the home. Also, titling property jointly with someone other than a spouse may be considered a gift to the joint owner. Each time a mortgage payment is made, tax laws treat it as another gift having been made to the joint owner, which may further complicate gift tax reporting.
- Probate — Married couples are often attracted to the probate avoidance benefits of joint tenancy. While joint tenancy avoids probate on the first death, it does not offer the same protection on the death of the second spouse or if the spouses die together. The intent of the will and/or trust may also be disregarded as title to jointly held property passes to the joint owner upon death.
- Federal estate tax — Joint ownership with individuals other than a spouse offers no protection against federal estate taxes, and the entire amount of the joint property is generally included in the calculation of federal estate taxes. Generally, joint assets of married couples do not trigger federal estate taxes on the death of the first spouse based on the unlimited marital deduction, but they also do not take advantage of the deceased spouse’s unified credit.
- Gifts and gift tax — Upon death, if the joint owner acknowledges the original owner’s wishes and shares a jointly owned account with other family members, and if those family members’ shares exceed $14,000 (in 2015), then the joint owner may be liable for gift tax. The Internal Revenue Service may deem the transaction as a taxable gift from the joint owner rather than an inheritance from the parent.
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