Read more about the article Pitfalls of Joint Ownership

Pitfalls of Joint Ownership

Many people add family members or spouses as joint owners of bank accounts, real estate, or investments to simplify estate planning and avoid probate. While joint ownership can offer convenience and asset access, it also presents serious risks that can lead to financial disputes, tax liabilities and legal challenges.

Understanding the downsides of joint ownership is essential before making decisions that could impact your estate and beneficiaries.

What Is Joint Ownership?

Joint ownership means that two or more people share legal ownership of an asset. There are different forms of joint ownership, each with unique rights and implications. Some common types of joint ownership include:

  • Joint Tenancy with Right of Survivorship (JTWROS) – If one owner dies, the other owner(s) automatically inherit the asset. Common among spouses.
  • Tenancy in Common – Each owner holds a separate, distinct share of the property. Shares can be passed down in a will instead of automatically transferring to co-owners.
  • Tenancy by the Entirety – A unique form of joint ownership for married couples that offers protection from creditors in some states.
  • Joint Ownership of Bank Accounts – Gives all owners full access to funds, even if one person contributed all the money.

While these arrangements may seem beneficial, they can create unintended financial and legal consequences.

The Risks of Joint Ownership

1. Loss of Full Control Over the Asset

Adding a co-owner means you no longer have sole decision-making power. If you own property or an account jointly, the other person:

  • Must approve any sale or significant financial decision
  • Can legally withdraw funds or take actions you may disagree with
  • May refuse to cooperate in estate planning decisions

For example, if you add an adult child to your house deed, you cannot sell or refinance the home without their approval. If your relationship changes, legal conflicts may arise.

2. Exposure to the Co-Owner’s Debts and Liabilities

If a joint owner has debt, gets sued, or divorces, creditors can go after jointly owned assets. This means:

  • A co-owner’s financial troubles can result in liens or judgments against your property
  • The asset may be subject to seizure by creditors or division in a divorce settlement
  • You could lose control over the asset due to someone else’s financial mistakes

This is particularly risky when adding children or relatives with unstable finances or creditor issues.

3. Unintended Tax Consequences

Joint ownership can create tax problems, especially when transferring assets. Common tax issues include:

  • Capital gains taxes – If a property or investment is sold, the IRS may assess capital gains based on the original purchase price, not the market value at death.
  • Gift tax liability – Adding someone as a joint owner may be considered a taxable gift, requiring IRS reporting if it exceeds the gift tax exemption limit.
  • Loss of step-up in basis – Heirs who inherit assets outright get a “step-up” in tax basis to current market value, reducing capital gains taxes. With joint ownership, this benefit may be lost.

Without proper estate planning, heirs may owe more in taxes than necessary.

4. Complications in Estate Planning

Many people use joint ownership to avoid probate. However, this strategy can backfire. Risks include:

  • Disinheriting intended beneficiaries – If one joint owner survives, they get full ownership—even if your will says otherwise.
  • Unequal distribution of assets – If you own multiple assets jointly with different people, some heirs may receive more than intended.
  • Legal disputes – Family members may contest asset distribution if joint ownership conflicts with your will.

A well-structured trust or beneficiary designation often provides a more reliable way to pass down assets.

When Joint Ownership Might Be Appropriate

Despite its risks, joint ownership can be helpful in certain situations. For instance, it’s suitable if you trust the co-owner completely and want them to have full rights to the asset. There are also few drawbacks if the asset has minimal value or no tax consequences or if both parties contribute equally to the asset.

In most cases, estate planning tools such as trusts, payable-on-death accounts, or transfer-on-death deeds provide greater protection and control.

Protect Your Assets with Smart Estate Planning

While joint ownership may seem easy, it often creates more problems than it solves. Before adding someone to your assets, it’s essential to consider the legal, financial and tax consequences.

Our law firm helps individuals and families navigate estate planning strategies that protect assets, minimize taxes and meet inheritance goals. Schedule a consultation today to explore better alternatives to joint ownership.

Key Takeaways

  • Joint ownership limits control over assets: Adding a co-owner means they have equal decision-making power and access, which may not align with your intentions.
  • Co-owners’ financial troubles can affect you: Debts, lawsuits, or divorce can place jointly owned assets at risk of seizure or legal disputes.
  • Tax implications may be significant: Gifting rules, capital gains taxes and loss of step-up in basis can create unexpected tax burdens.
  • Joint ownership can override estate plans: If a surviving joint owner is not your intended heir, your assets may not be distributed according to your wishes.
  • Alternative estate planning tools may be better: Trusts, payable-on-death accounts and clear beneficiary designations provide more control and protection.

Reference: Investopedia (March 02, 2024) “Joint Tenancy: Benefits and Pitfalls”

Addressing Vacation Home in Another State in Estate Planning – Annapolis and Towson Estate Planning

Many families have an out-of-state cabin or vacation home that is passed down by putting the property in a will. While that is an option, this strategy might not make it as easy as you think for your family to inherit this home in the future.

Florida Today’s recent article entitled “Avoiding probate: What is the best option for my out-of-state vacation home?” explains the reason to look into a more comprehensive plan. While you could just leave an out-of-state vacation home in your will, you might consider protecting your loved ones from the often expensive, overwhelming and complicated process of dealing both an in-state probate and an out-of-state probate.

There are options to help avoid probate on an out-of-state vacation home that can save your family headaches in the future. Let’s take a look:

  • Revocable trust: This type of trust can be altered while you are still living, especially as your assets or beneficiaries change. You can place all your assets into this trust, but at the very least, put the vacation home in the trust to avoid the property going through probate. Another benefit of a revocable trust is you could set aside money in the trust specifically for the management and upkeep of the property, and you can leave instructions on how the vacation home should be managed upon your death.
  • Irrevocable trust: similar to the revocable trust, assets can be put into an irrevocable trust, including your vacation home. You can leave instructions and money for the management of the vacation home. However, once an irrevocable trust is established, you cannot amend or terminate it.
  • Limited liability company (LLC): You can also create an LLC and list your home as an asset of the company to eliminate probate and save you or your family from the risk of losing any other assets outside of the vacation home, if sued. You can protect yourself if renting out a vacation home and the renter decides to sue. The most you could then lose is that property, rather than possibly losing any other assets. Having beneficiaries rent the home will help keep out-of-pocket expenses low for future beneficiaries. With the creation of an LLC, you are also able to create a plan to help with the future management of the vacation home.
  • Transfer via a deed: When you have multiple children, issues may arise when making decisions surrounding the home. This is usually because your wishes for the management of the house are not explicitly detailed in writing.
  • Joint ownership: You can hold the title to the property with another that’s given the right of survivorship. However, like with the deed, this can lead to miscommunication as to how the house should be cared for and used.

Plan for the future to help make certain that the property continues to be a place where cherished memories can be made for years to come. Talk to a qualified estate planning attorney for expert legal advice for your specific situation.

Reference: Florida Today (July 2, 2022) “Avoiding probate: What is the best option for my out-of-state vacation home?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Can I Add Children’s Names to my House Deed? – Annapolis and Towson Estate Planning

There are many ways that this simple strategy can go very wrong, very quickly. If one of the joint owners is sued, or files for bankruptcy, the home is vulnerable, reports a recent article titled “Naming a child on your deed to avoid probate? Here’s why you may want to reconsider” from St George News.

That is just the beginning.

As any estate planning attorney will tell you, things change when significant assets are involved. Your son or his new wife may decide they do not want you to rent, sell or refinance your home. They have the power as co-owners to stop you from doing anything with the house. All they have to do is refuse to sign the paperwork.

If one child is on the deed and you and your spouse both die, the one child owns the house outright. If there are other siblings, no matter what your will says, the siblings have no legal right of ownership. Your other children will need to go to court and will likely not win.

If all of your children are named as joint tenants with you and your spouse on a deed, only the surviving children will own the home after the death of the surviving spouse. If one of your children predeceases, then the share belonging to any such sibling will disappear, and their children (your grandchildren) will not receive anything.

Naming multiple children as joint owners on a deed also opens you up to more exposure. Even if your children are model citizens, things happen, including divorces, auto accidents, bankruptcies and other unexpected events. Business owners who run into problems can spell disaster for a family-owned asset of any kind. The more siblings with ownership interests in the home, the more risk.

It gets even more complicated if you and a joint tenant child die in a common accident. Determining who died first will determine who is entitled to the home. If you live longer than your child, even by a few minutes, your estate may then own the home.

As is often the case, when people decide they have found a simple solution, complex problems follow. The lawsuits resulting from the situations described above are common, expensive and can cause families to break apart. Your estate planning attorney can explain how an estate plan, with proper ownership, possibly a trust and other legal strategies, will achieve the desired goals without putting the estate and the family’s relationships at risk.

Reference: St George News (Jan. 30, 2022) “Naming a child on your deed to avoid probate? Here’s why you may want to reconsider”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Write a Letter of Instruction for Loved Ones – Annapolis and Towson Estate Planning

A letter of intent is frequently recommended for parents of disabled children to share information for when the parent dies. However, letters of intent or a letter of instruction can also be a helpful resource for executors, says the article “Planning Head: For detailed instructions consider a letter of instruction” from The Mercury. This is especially valuable, if the executor does not know the decedent or their family members very well.

For disabled children, legal documents address specific issues and are not necessarily the right place to include personal information about the child or the parent’s desires for the child’s future. Estate plans need more information, especially for a minor child.

The goal is to create a document to make clear what the parents want for the child after they pass, whether that occurs early or late in the child’s life.

For a disabled child, the first questions to be addressed in the estate plan concern who will care for the child if the parent dies or becomes incapacitated, where will the child live and what funds will be available for their care. Once those matters are resolved, however, there are more questions about the child’s wants and needs.

The letter of intent can answer questions about the special information only a parent knows and is helpful in future decisions about their care and living situation.

The letter of intent concerning an estate should also include information about wishes for a funeral or burial and contain everything from directions for the music list for a ceremony to the writing on the headstone.

Once the letter of intent is created, the next question is, where should you put it so it is secure and can be accessed when it is needed?

Do not put it in a bank safe deposit box. This is a common error for estate planning documents as well. The executor may only access the contents of the safe deposit box after letters of administration have been issued. This happens after the funeral, and sometimes long after the funeral. By then, it will be too late for any instructions.

Keeping estate planning documents in a safe deposit box presents other problems. If the bank seals the safe deposit box on notification of the owner’s death, the executor will not be able to proceed. This can sometimes be prevented by having additional owners on the safe deposit box, if permitted by the bank . Any additional owners will also need to know where the key is located and be able get access to it.

The better solution is to keep all important documents including wills, financial power of attorney, health care powers, living wills, or health care directives, insurance forms, cemetery deeds, information for the family’s estate planning attorney, financial advisor, and CPA, etc., in one location known to the trusted person who will need access to the documents. That person will need a set of keys to the house. If they are kept in a fire and waterproof safe in the house; they will also need the keys to the safe.

If the parents move or move the documents, they will need to remember to tell the trusted person where these documents have moved. Otherwise, a lot of work will have been for naught.

Reference: The Mercury (Jan. 19, 2022) “Planning Head: For detailed instructions consider a letter of instruction”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Do You Gift Your House to Your Children during Your Lifetime? – Annapolis and Towson Estate Planning

Whether you have a split level or a log cabin, your estate plan should be considered when passing property along to the next generation. How you structure the transaction has legal and tax implications, explains the article “How estate planning can help you pass down a house to your kids and give them a financial leg up” from USA Today.

For one family, which had been rental property landlords for more than two decades, parents set up a revocable trust and directed the trustee to be responsible for liquidating houses only when they became vacant, otherwise maintaining them as rental properties as long as tenants were in good standing. They did this when the wife was pregnant with their first child, with the goal to maximize the value to their children as beneficiaries. This was a long-term strategy.

Taxes must always be considered. When a home or any capital asset is given to children while the parents are alive, there may be a capital gains tax issue. It is possible for the carryover cost basis to lead to a big cost. However, using a revocable trust avoids probate and gives them a step-up in basis to avoid capital gains taxes.

Many families use a traditional method: gifting the house to the children. The parents retain the ownership and benefit of the property during their lifetimes. When the last parent dies, the children get the home and the benefit of the stepped-up basis. However, many estate planning attorneys prefer to have a house pass to the next generation through a revocable trust. It not only avoids probate but having a trust allows the parents to dictate exactly what is to be done with the house. For example, the trust can be used to direct what happens if only one child wants the house. The one who wants the house can have it, but not without buying out the other children’s’ shares.

If the children are added onto the deed of the house, keep in mind whoever is added to the deed has all the rights and liabilities of an owner. If one child wants to live in the home and the others do not, the others will not be able to sell the house. The revocable trust mentioned above provides more control.

Selling the family home to an adult child may work, especially if the parents cannot afford to maintain the home and the child can. However, there are pitfalls here, since the parents lose control of the home. An alternative might be to deed the property to the children, have the children refinance the property and cash the parents out.

If parents sell the home below fair market value, they are giving up proceeds to finance their retirement. If they do not need the money, great, but if not, this is a bad financial move. There are also taxable gains consequences, if the home is sold for more than they paid. A home’s sale might result in a dramatic increase in property taxes to the buyer.

However you decide to pass the family home or other real estate property to children, the transfer needs to be aligned with the rest of your estate plan to avoid any unexpected costs or complications. Your estate planning attorney will be able to help determine the best way to do this, for now and for the future.

Reference: USA Today (Dec. 3, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys