Owning assets jointly with one or more children or other heirs is a common estate planning “shortcut”. But like many shortcuts, it can produce unintended — and costly — consequences.
Advantages
There are two potential advantages to joint ownership: convenience and probate avoidance with regard to that asset. If you hold title to property with a child as joint tenants with “rights of survivorship”, when you die, the property is transferred to your child automatically. For that particular asset, you don’t need a trust or other estate planning vehicles and that particular asset will be excluded from your probate estate.
Disadvantages
While joint ownership offers some simplicity, but it can also create a number of problems, especially if you add someone as a co-tenant instead of a joint tenant with right of survivorship, including:
Unnecessary taxes. Adding a child’s name to the title or deed may be considered an immediate taxable gift of one-half of the property’s value. And when you die, the [entire/your share? ] property’s value then will be included in your taxable estate, though any gift tax paid with the original transfer would be allowed as an offset.
Creditor claims. Joint ownership exposes the property to judgments held by your co-owner’s creditors, including former spouses or the other parent of any children he or she may have.
Loss of control. Your co-owner may be able to dispose of certain jointly titled property without your consent or prevent you from selling or borrowing against that property.
You may not be able to change your mind. With a will or trust, you control all aspects of the disposition of your assets. With real estate, once someone else is on the deed, it is a one-way gift and you cannot redirect that asset without their consent.
Unintended consequences. If your co-owner predeceases you, his or her share of the property may pass according to his or her estate plan or the laws of intestate succession. If you hold the property as co-tenants, instead of joint tenants with the rights of survivorship, for instance, you’ll generally have no say in the ultimate disposition of that portion of the property.
A properly drafted trust can avoid these problems without the need for probate. If you have additional questions on how to address your assets in your estate plan, please contact Jason Smolen at jdsmolen@smolenplevy.com or Daniel Ruttenberg at dhruttenberg@smolenplevy.com.
