People often set up bank accounts or real estate so that they own them jointly with a spouse or other family member. The appeal of joint ownership, specifically with survivorship rights, is that when one owner dies, the other owner(s) will automatically inherit the property without it having to go through probate. Also, joint property ownership is easy to set up. It can be established at the bank when opening an account, through the title company when buying real estate, or, in some cases, after creating an account or purchasing real estate.
While this may seem like an attractive option for succession planning, joint ownership also has the potential to cause disastrous unintended consequences and complications. Consider some of these important facts before adding someone as a joint owner to an account or piece of property.
The other joint property owner’s debts may become your problem.
Any debt or obligation incurred by the other joint owner could affect you. If the joint owner files bankruptcy, has a tax lien, or has a judgment against them, you could end up with a new co-owner一your old co-owner’s creditors! For example, if you add your adult child to the deed on your home and they have debt you do not know about, your property could be seized to collect that debt. Although “your” equity of the property will not necessarily be taken, that is little relief when your home is put on the auction block!
Your joint property could end up going to someone you did not intend.
Blended family structures have the potential to result in situations that can be difficult or impossible to navigate when someone dies. If you own your property jointly with your spouse and you die, your spouse gets the property. That may seem like what you intended, but what if your surviving spouse remarries? Your home could become shared between your spouse and their next spouse. This gets especially complicated if there are children involved: Your property could conceivably go to the children of your spouse’s next marriage rather than, or in addition to, your own children.
You could accidentally disinherit family members with joint property.
If you designate someone as a joint owner and you die, you cannot control what they do with your property after your death. Perhaps you and your adult child co-owned a business. You may state in your will that the business should be equally shared with your spouse or divided between all your kids; however, the rights of joint owners take priority over the terms of your will, meaning the joint owner will now have full ownership and control over the property.
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 owner agrees, you could end up at a standstill from the sales perspective一that is, unless you are 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 incur the cost of the lawsuit.)
What if your joint owner becomes unable to manage their affairs through accident or illness and does not have a durable power of attorney in place? In that case, you may have to go to court to have a guardian or conservator appointed to represent the joint owner’s interest in the sale. Even if you and your joint owner always worked together to make decisions, an appointed guardian may see their fiduciary responsibility as it relates to protecting the other joint owner’s financial interest differently, which might mean going against you and your wishes.
Joint Property 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 your adult child a joint owner of your property and you sell the property, you are both potentially responsible for the resulting taxes. Your adult child may be unable to afford a tax bill based on decades of appreciation.
On the other hand, beneficiaries who inherit property at the owner’s death only pay capital gains taxes if (and when) they decide to sell the property. These taxes are based on the increase in value from when they inherited the property (the date of the owner’s death), not from the day the original owner first acquired it. People worry about estate taxes so much that they forget about income taxes. In this scenario, setting up your property to transfer through inheritance (rather than joint ownership) could save your loved ones a fortune in income tax. And with the often-generous estate tax exemption, most of us do not have to worry about estate tax; income and capital gains tax, however, can hit almost anyone.
You could cause your unmarried partner to have to pay a gift tax.
If you add your unmarried partner as the joint owner of your home, the Internal Revenue Service will consider that transfer of ownership to be a taxable gift to your partner. This can create needless paperwork and, depending on the value, the owing of gift taxes.
So, what can you do?
These decisions are too important and complex to work through without the support of someone who routinely works in this area and understands the implications of joint ownership. Consult a law firm that specializes in estate planning. A good lawyer will help you decide how to manage your property to meet your needs and goals.
Our team can assist you in planning to reduce estate taxes, avoid potential legal pitfalls, and set up a plan to protect your loved ones. We understand not only the legal issues but also the complex relationships that can be involved in estate planning. We will listen to your concerns and help you develop a plan that gives you peace of mind while achieving your goals for your family. Contact us today for a consultation.
About Skvarna Law Firm in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. We provide legal services. We cover San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
