The Hidden Dangers of Joint Ownership

The Hidden Dangers of Joint Ownership

By Colton Powell, Law Office of Libby Banks

Nearly every month in our office, we host a seminar focused on busting the myths in estate planning. One of the most common misconceptions we hear is that joint ownership makes avoiding probate a breeze. “My daughter is a co-owner on my bank account” or “I added my son to my deed to avoid probate” are just a few examples.

To be clear, joint ownership with a spouse is not the issue. However, joint ownership with children, siblings, or domestic partners can create a web of issues. Many times, this can create even more issues than probate itself. Why is that the case?

Well, when someone jointly owns an asset with another person, they have legal rights to that asset the same way that the original sole owner once did. The original sole owner gives up their sole control over that asset when they add a joint owner. The way these legal rights operate depends on the type of asset. There are different rules for regular checking and savings accounts as opposed to real estate, for example.

Our laws have been created with the idea in mind that married couples likely own most, if not all, of their property jointly. There are protections, in both state and federal laws, for joint ownership between spouses. The same cannot be said for joint ownership between parent and child, brother and sister, or girlfriend and boyfriend. So, when these people jointly own property together, unintended consequences can arise.

Unfortunately, many people never realize these dangers until it’s too late.

Take, for example, the mother who added her daughter as a co-owner on her bank account. We’ve all heard stories where this arrangement went off without a hitch. However, consider the real possibility that daughter ends up divorcing her husband. In this case, since daughter is a co-owner of her mother’s bank account, that account is an available asset that can be sucked into those divorce proceedings. Now, mom’s money could end up in the hands of her former son-in-law.

Consider another case where brother and sister own real estate together. This is not uncommon where one or both of them are unmarried and don’t have any children of their own. However, if sister gets into a car accident and faces a lawsuit for the injuries she caused, that house is an asset that could be used to satisfy a judgment against her.

This is all because he added her as a joint owner to his deed during his lifetime rather than creating an estate plan for her to inherit it after his passing. The former is a present interest that can be seized; the latter is merely a future interest that offers little to no present value for anyone to come after.

Finally, let’s consider the unmarried life partners who decide to move in together.

Boyfriend decides to sign a quitclaim deed transferring his home from his name to both him and his girlfriend as tenants in common. The problem with this arrangement is that, without being married, these two are “legal strangers” to one another. This simple quitclaim creates both tax issues and probate issues.

On the tax side, this type of transfer can be considered a gift that the boyfriend should have reported to the IRS by filing a gift tax return.

On the probate side, since there’s no right of survivorship, he could end up co-owning his home with his girlfriend’s family if she passed away without an estate plan.

The common thread we see is that these joint ownership arrangements are usually motivated by good intentions. When we explain these issues to clients, after the initial shock, we usually hear things like “I thought I was making things easier for my family” or “I just wanted to make sure my house didn’t end up in probate.”

These are relatable, understandable goals and creating an estate plan is the most effective way to accomplish them. Joint ownership, on the other hand, simply comes with too many hidden risks.

Hopefully, we have dispelled you of the notion that joint ownership is a good way to avoid probate.

For more estate planning myths, I would invite you to attend one of our upcoming seminars on August 13, September 17, October 15, or November 5. You can register to attend on our website at www.libbybanks.com.

As always, if you need our help, you can schedule a free estate planning consultation by calling our office at 602-375-6752.