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Joint Ownership – A Major Trap

September 16, 2015 Douglas Davis

I often hear people say they don’t need an estate plan because all of their assets are held jointly with their spouse or with one or more of their children.

Although this seems to be a convenient way to own assets, re-titling accounts or making a child or spouse a joint owner might be the worst way to plan your estate for the following reasons:

  1. Joint ownership of assets could expose you to gift taxes or require the filing of a gift tax return when joint ownership is established. When you add someone to your account, you have made a gift of that asset to that person. If the value of the account is over $14,000, a gift tax return should be filed with the Internal Revenue Service.
  2. Jointly held accounts do not receive a full step up in tax cost basis at the death of the original account holder, resulting in capital gains taxes that would not have otherwise occurred. A person receiving a lifetime gift inherits the donor’s tax basis. If the gift is made under the terms of a Will or Trust, the beneficiary receives a step up tax basis equal to the fair market value of the gift at the donor’s death.
  3. Jointly held accounts are subject to the claims of any creditor of any joint owner. They are also subject to the claims of any owner’s spouse and their children, are often included in a divorce, bankruptcy or in other third party claims against a joint owner.
  4. Jointly held accounts will circumvent your intent as expressed in your Will or Trust. A joint account ownership designation trumps your Will or Trust. Many children are accidently disinherited because of jointly owned accounts and designations.
  5. A joint account has to go through probate after the death of the last owner.

Assets that are jointly owned are not governed by your Will or Trust, are not protected from creditors or from spousal claims of a joint owner, do not receive preferable step up in basis tax treatment and at your death, may be paid to someone other than your loved ones.

While joint ownership does provide for the surviving owner to receive the entire property upon the death of the other owners, no provisions are included for the disposition of the property upon the death of the survivor. In addition, the joint owner who is intended to be the survivor may die first, frustrating the intent of the parties. Worse than this, however, is that often the survivor remarries and then at death everything goes to a new spouse and their children, leaving children from the first marriage with nothing!

Inequality among children also occurs when investment accounts, vehicles, real estate, life insurance policies, retirement plans, checking and savings accounts and other assets are not titled in accordance with both short and long term objectives. Sometimes we hear that a parent has put their son or daughter on their investment account, real estate or checking account to make it easier to handle if “anything happens to me.”   This often results in providing one child with more than the others, or in a total loss through the attack of creditors or the divorce of that child.

There are better ways to deal with concerns about incapacity and succession planning than to establish joint accounts. All of us want the peace of mind that comes when our family values, wealth, and property effectively provides a legacy for future generations. It is worth a conversation with a qualified professional to determine how best to protect assets that you want to pass down to your loved ones.