Three’s a Crowd, and Two Can Be Too: The Pitfalls of Joint Property Ownership (Part 2 of 2)

In Part 1 of this two-part series, we discussed a few of the ways that joint ownership of assets can complicate an estate plan by unintentionally changing the manner in which assets are distributed after someone dies. Part 2 of this series will examine some additional issues that can arise when assets are titled in joint ownership, with a particular focus on problems that this form of ownership can cause for the beneficiaries of your estate.

1. Unintentional tax burden. If you own an asset and later add someone else as a joint owner, it could result in an unintended tax burden for both of you.

Say for instance that you own a beach house in your sole name, but your daughter and her family love to vacation in that area. She enjoys using the vacation home so much that you decide to add her to the deed. Assuming she doesn’t contribute anything toward the purchase price of the property, this would be considered a gift and one-half of the current value of the property (less any available annual gift tax exclusion) would need to be reported on a gift tax return. Depending on the value of other prior lifetime gifts you’ve made, this could result in gift tax presently due or could reduce the amount of your remaining exemption for lifetime gifts.

While it remains to be seen whether there will be any changes to legislation regarding stepped-up basis upon death, under the current law this could also create unintended tax burdens for your daughter as she would receive a carryover basis in the one-half interest transferred to her by deed. If it has appreciated significantly since you first acquired it, then it could be more beneficial from an income tax planning perspective to keep the property in your name and include a provision in your estate planning documents leaving the property to your daughter at your death. That would allow her to receive a stepped-up basis in the property equal to the value at the time of your death, which could greatly reduce the capital gains tax that would be due if and when the property is sold in the future.

Additionally, a tax burden could be created if a surviving owner decides to honor your wishes by splitting the asset with the other intended beneficiaries after your death (or transferring the entire asset, if they weren’t intended to be a beneficiary at all). Since they are considered to become the owner of the asset upon your death, regardless of what your estate planning documents say, they will be considered to have made a gift of any portion of the asset that they transfer to others after your death, even if they do so in order to transfer it to the people you wished to receive it under the terms of your will or trust. Thus, a gift tax return will need to be filed and gift tax may be due (or their lifetime gift tax exemption will be reduced by the value of the gift(s)).

2. Not certain to avoid probate. Some people use joint ownership as a means of avoiding probate since the asset passes automatically to the surviving owner. But what happens if the joint owner predeceases you and you neglect to update that account ownership, or if you both die simultaneously? The asset would likely become subject to your probate estate and could incur probate fees based on its value. For someone with a living trust-based estate plan, these fees could be avoided if the asset were titled in the name of the trust at the account holder’s death. Also, distribution as part of the probate estate might not result in the asset passing to the intended beneficiary. For instance, say you named your son as joint owner of a stock account that you wished to pass to him upon your death. Tragically, he dies in a car accident, leaving behind two college-aged children who you wish to receive the stock that their father would have received. However, since you didn’t update the ownership of the stock account prior to your death, it passes under the residuary clause of your will, which ultimately divides it equally into three shares for your two living children and the children of your deceased son. If you had titled the account in the name of your trust instead and designated your son as the beneficiary of the account, you easily could have included a provision for the account to pass to his children under the current circumstances.

3. Issues dealing with the other joint owners when managing the property. A number of difficulties could arise when dealing with property owned by two or more joint owners, especially in the case of real estate. If you add another person to a deed as a joint owner of the property, you could unknowingly open yourself up to that person’s debtors if the joint owner files for bankruptcy or has a tax lien or judgment filed against them. This could result in the property being seized and could greatly reduce your ability to sell your interest in the property down the road.
Even without potential creditor attacks, you might wind up jeopardizing your ability to manage and dispose of the property if you add joint owners to the deed since they will each need to sign off on any future transactions. If a joint owner disagrees with the decision to sell or mortgage the property, you could wind up at a stalemate and facing the decision of whether to petition the court for a partition of your interests in the property. Not only could this be costly from both a time and monetary standpoint, but it could wind up hurting your ability to sell your interest in the future and, perhaps more importantly, could wind up creating tensions within the family that might not have arisen otherwise.
While there are a number of situations in which titling an account, property, or other assets in joint ownership might make sense for your planning goals, it’s crucial to analyze it in the context of your overall planning strategy. At Strauss Attorneys, we’re dedicated to making sure that every aspect of your plan is carefully considered so that your goals are met. Contact us today if you have any questions about how best to title your assets so that they’re properly coordinated with your estate planning documents. You can schedule an appointment at our Asheville office at 828-258-0994, or to make an appointment with our Hendersonville office call 828-696-1811. We now also have our newest location in Raleigh, North Carolina. To make an appointment with our Raleigh team, call 919-825-0932. You can find out more about us on our website at www.StraussLaw.com.