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That Joint Ownership Thing May not be Good Estate Planning?

Posted by Gregory Poulos | Feb 25, 2018 | 0 Comments

Should you do it?
Not really.

Historically, joint ownership of property has been a popular estate planning tool. Adding a partner, child or close friend as a joint owner on one or more of your assets does have advantages. The survivor automatically becomes the owner of the property, so no need to change title or administer the assets through the estate. It can be a smooth and simple passing of assets. In addition, a child or friend can step in easily and beginning managing your property and finances.

Naturally, many married couples hold joint assets like bank accounts, property and other financial assets. But this tool is being used more and more frequently between parents and children. Among other things, the objective is to minimize or avoid probate fees. However, there are some pitfalls you should know about.

Tax Consequences
When you add a joint owner to your assets it is considered a gift. If it is more than 14,000 per year, then you are required to report that “gift” to the IRS. When a joint owner (other than a spouse) dies, the tax law treats him or her as owning 100% of the value of the jointly held property, and includes the entire amount in his or her estate to determine whether estate taxes will be due. As soon as the property changes hands, it triggers any unrealized capital gains and results in immediate tax (property can only be rolled over tax-free to a spouse).

Control Disputes
Once you become a joint owner, you are now at the mercy of the joint owner(s). Disputes can arise over any aspect … bank accounts, maintenance, payment of expenses, receipt of income, sale of property and more. A joint owner might even be able to force a sale of the property by using the courts to resolve differences.

This is a big one when it comes to kids. Joint ownership can expose a property to claims by the joint owner(s) personal or business creditors or a spouse seeking alimony during a divorce. For example, let's assume you add a daughter as a joint owner of the property. She gets into financial trouble and you suddenly find creditors are coming after that jointly held property. They will get it.

Lack of Control
If a joint owner becomes incapacitated and is incapable of making decisions, you cannot automatically step in a do so even though many people think you can. You now have to work with the appointed joint owner's attorney or guardian of their property. That person may have a legal obligation to liquidate a non-productive asset, no matter what you want.

No Complex Tax or Succession Planning
Joint ownership may skirt around probate, but it also prevents more efficient tax and succession planning that works much better.

Forfeit Tax Benefits
When you die owning appreciated property, your heirs receive one of the most important benefits in the whole tax code, called a “stepped up basis” in the property. For example, if you bought your house for $250,000 and it is worth $350,000 when you die, then your children will inherit the property from you at its “stepped up” basis ($350,000, the value on your date of death). If they later sell the property for $350,000, then, the $100,000 worth of capital gain just disappears. Unfortunately, lifetime gifts don't get a “stepped up” basis. Instead, those lifetime gifts pass your basis in the property to the recipient (called a “carryover basis”). So, using the same example, if you've added a child to your Deed as a joint owner, then he or she will receive your $250,000 basis in the property, and when the property is later sold for $350,000, there will be taxable gain of $100,000 on the sale.

Other Options
Fortunately, there are other estate planning options that can provide you with the same conveniences as joint ownership, without the tax issues and other risks. Please call me to talk about the options.

About the Author

Gregory Poulos

Meet Greg PoulosAn Experienced Estate Planning & Business Attorney serving the Phoenix AreaGregory Poulos counsels clients on the best strategies for accomplishing their estate planning and business goals. Greg starts by “Putting His Clients at Legal Ease” so that they understand the legal issues...


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