Owning property comes with many ups and downs. So it’s no surprise that “joint ownership” can be double the trouble. A recent article in Forbes reviews some of “The Perils Of Joint Ownership.”
Having two people named as owners, legally dubbed “joint tenants with right of survivorship,” or “joint tenancy” for short, is a quite common strategy among the elderly and families who have experienced a life change. Unfortunately, unless the joint owners are spouses (the most common form of joint ownership by far) it can quickly become a problematic scenario.
Imagine: homes, bank accounts, and other common assets being controlled by two independent minds with independent agendas. The original article provides a number of examples, but an all-too-common scenario is the older relative and a younger relative owning the assets of the older relative in joint tenancy. If and when the younger relative realizes that he or she has the power to use and enjoy the joint assets, then problems are not far behind.
What are some other concerns? The original article fleshes out three:
- Once a person’s name is added to the title of property, it can be undone only with his or her consent. This may cause problems down the road if you want to sell the property, for instance.
- Property held in joint tenancy is immediately subject to claims of each joint tenant’s creditors. So if your joint owner divorces or is sued, for example, the property may be at risk.
- Joint tenancy can produce unintended results. If there is a right of survivorship, the property will pass to the joint owner at your death, even if your will commands that it go to someone else.
A scenario I have seen in Pennsylvania is aging parents planning to “transfer” part ownership of the family home to their children now, in the hopes of avoiding the PA inheritance tax that would
apply if the property passed to the children at their deaths. The primary problem with this strategy is that the taxing authorities are wise to it, and they have disregarded transfers to children in cases where the parent or parents have retained complete control of the property without any indication of the children’s ownership (such as paying rent at market rate or the child living in the property). In such cases, the inheritance tax was applied despite the deed naming the children as joint owners.
In addition, adding children to your deed may cost more money in the long run if you end up selling the property rather than living in it for the rest of your life. Why? Because as joint owners, your children will recognize taxable capital gain on their portion of the property (as non-occupants, they are not entitled to a tax exemption on the sale). Additionally, your children will have your basis in
the property rather than the stepped-up basis to current market value that they would have received via inheritance. If your property has appreciated since you purchased it, the taxable gain may be
substantial. You might just be trading a 4.5% inheritance tax for a capital gains tax of up to 15-20% (or up to 35% if the property is sold within a year of the transfer).
Bottom line? Sometimes joint tenancy is a valid option, and even a quite beneficial one. But often, there are other safer alternative means to reach the same ends.
For more information about how to transfer your property to your loved ones while still protecting yourself and your future, or for answers to your other estate planning questions, contact us at Peak Legal Group to schedule a complimentary estate planning consultation.
Reference: Forbes (June 14, 2013) “The Perils Of Joint Ownership”