People often set up bank accounts or real estate so that they own it jointly with a spouse or other family member (for example, elderly father adds his son as a joint tenant on title to the father's residence). 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 also perceived to be easy to setup since it can be done at the bank when opening an account or title company when buying real estate.
That's all well and good, but 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.
The other owner's debts become your problem.
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 them, it could cause you to end up with a new co-owner - your old co-owner's creditors! In the case of a bankruptcy, the bankruptcy trustee will actually sue you! For example, if you add your adult child to the deed on your home, and he has debt you don't know about, your property could be seized to collect that debt. Although “your” equity of the property won't necessarily be taken, that's little relief when the house you live in is put up on the auction block!
Your property could end up belonging to someone you don't intend.
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/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 to your own.
You could accidentally disinherit family members.
If you designate someone as a joint owner and you die, you can't control what she does with your property after your death. Perhaps you and an adult child are joint tenants of a vacation home in Mammoth that you two rent out other families most of the year. You even agreed between the of you that the vacation home should be equally shared with your spouse or divided between all of your kids at your death; however, ownership goes to the survivor - regardless of what you put in your will.
You could have 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 conservator to represent the co-owner's interest in the sale. While you and your co-owner always worked together, an appointed conservator may see his/her responsibility as protecting the other owner's interest–which might mean going against you.
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 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, not from the day you first acquired it (this also referred to as a step-up in cost basis). 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 $5.49 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 could cause your unmarried partner to have to pay a gift tax.
If you buy property and place it 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.
These decisions are too important and complex to be left to chance. So what can you do? Let's start a conversation to help you decide the best way to manage your property to meet your needs and goals.