People often set up bank accounts or real estate jointly with a spouse or other family member. The appeal of joint tenancy is that when one owner dies, the other will automatically inherit the property without it having to go through probate. Joint property is perceived to be easy to set up since it can be done at the bank when opening an account or title company when buying real estate.
However, joint ownership can also cause unintended consequences and complications. And it’s worth considering some of these before deciding that joint ownership is the best way to pass on assets to your heirs.
So let’s explore some of the common problems that can arise.
Debts and Obligations
Any debt or obligation incurred by the other owner could affect you. If the joint owner files bankruptcy, has a tax lien, or has a judgment against him or her, it could cause you to end up with a new co-owner – their creditors! For example, if you add your adult child to the deed on your home and they have debt you don’t know about, creditors could seize your property to collect that debt. Although “your” equity in the property isn’t gone, that’s little relief when the house you live in is put up on the auction block!
Some of the most difficult situations come from blended families. If you own your property jointly with your spouse and you die, your spouse gets the property. On the surface, that may seem like what you intended, but what if your surviving spouse remarries? Your home could become shared between your spouse and his or her second spouse. And this gets especially complicated if there are children involved: Your property could conceivably go to children of the second marriage rather than your own.
Disinherit Your Loved Ones Accidentally
If you designate someone as a joint owner and die, you can’t control what they do with your property after your death. Perhaps you and an 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 of your kids; however, ownership goes to the survivor – regardless of what you put in your will.
Difficulty Selling or Refinancing Your Home
All joint owners must sign off on a property sale. Depending on whether the other joint owners agree, you could end up at a standstill from the sales perspective. That is unless you’re willing to take the joint owner to court to force a sale of the property. (No one wants to sue their family members, not to mention the cost of the lawsuit.)
And what if your co-owner somehow becomes incapacitated through accident or illness? In that case, you may have to petition a court to appoint a guardian or conservator to represent the co-owner’s interest in the sale. While you and your co-owner always worked together, an appointed guardian may see his responsibility as protecting the other owner’s interest–which might mean going against you.
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 an adult child a co-owner of your property, and you sell the property, you’re both responsible for the taxes. Your adult child may not be able to afford a tax bill based on decades of appreciation.
On the other hand, heirs only pay capital gains taxes based on the increase in value from when they inherited the asset to when they sell it, not from the day you first acquired it. So often, while people worry about estate taxes, in this case–inheriting a property (rather than jointly owning it) could save your heirs a fortune in income tax. And with today’s generous $11.18 million estate tax exemption, most of us don’t have to worry about the estate tax (but the income tax and capital gains tax hits almost everyone).
You can also create a gift tax by sharing property jointly. If you buy and place property in joint tenancy with an unmarried partner, the IRS will consider that to be a taxable gift to your partner. This can create needless paperwork and taxes.
So what can you do? These decisions are too important and complex to be left to chance. Consult an experienced attorney who specializes in estate planning. A good lawyer enables you to decide the best way to manage your property and meet your needs and goals. Our team at Hopler, Wilms, and Hanna can assist you in planning to reduce estate taxes, avoid potential legal pitfalls, or set up a trust to protect your loved ones. We understand not only the legal issues but the complex layers of relationships involved in estate planning. We’ll listen to your concerns and help you develop a plan that gives you peace of mind while achieving all of your goals you have for your family. Contact us today for a consultation.