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”

How Divorce Affects an Estate Plan

Divorce changes not only a person’s financial and personal life but also the way their assets will be handled after death. Many people overlook the importance of updating estate planning documents after a divorce, which can result in unintended beneficiaries receiving inheritances or former spouses retaining control over critical financial and medical decisions. Taking the time to revise an estate plan ensures that assets are protected and aligned with post-divorce goals.

How Divorce Affects Your Estate Plan

Divorce changes personal and financial circumstances and how assets will be distributed after death. Many forget to update their estate plans, leaving former spouses as beneficiaries or decision-makers. Without revisions, an ex-spouse could inherit assets, manage finances, or make medical decisions in an emergency.

Key documents that need immediate attention include wills, trusts, powers of attorney and beneficiary designations on life insurance and retirement accounts. Updating these ensures that assets go to intended heirs and that financial and medical decisions remain in trusted hands.

Updating Wills and Trusts

A divorce does not automatically remove an ex-spouse from an estate plan. If a will or trust still names the former spouse as a primary beneficiary or executor, they may inherit assets or retain authority over the estate. Updating key documents includes:

  • Revising a will to name new beneficiaries and executors
  • Amending or revoking any revocable trusts that include the former spouse
  • Reviewing state laws, some jurisdictions automatically void spousal provisions upon divorce, while others do not

Failing to update these documents may lead to unnecessary legal battles or the distribution of assets against the person’s wishes.

Changing Beneficiary Designations

Many financial assets pass directly to named beneficiaries outside of a will, making beneficiary updates essential after divorce. Documents to review include:

  • Life insurance policies and retirement accounts, such as 401(k)s and IRAs
  • Payable-on-death (POD) and transfer-on-death (TOD) accounts
  • Jointly held assets or real estate with right of survivorship

If an ex-spouse remains listed as a beneficiary, they may still receive these assets, regardless of the divorce decree. Updating beneficiary designations ensures that assets go to the intended individuals.

Adjusting Powers of Attorney and Healthcare Directives

Divorce often necessitates appointing new individuals to manage financial and medical decisions in case of incapacity. Changes to consider include:

  • Naming a new power of attorney for financial matters
  • Revising a healthcare proxy to designate a trusted individual for medical decisions
  • Ensuring that living wills and advance directives reflect current wishes

Leaving a former spouse in control of these decisions can lead to unintended complications, particularly in medical emergencies.

Spousal Elective Share

Some states, such as Maryland, have a spousal elective share which allows a surviving spouse to claim a portion of the deceased spouse’s estate, even if they were excluded from the will. This is a protection for a surviving spouse who might otherwise be left with nothing due to the deceased spouse’s will or other estate planning documents. A spouse can waive the right to an elective share if they signed a valid pre-nuptial agreement or post-nuptial agreement giving up this right.

Secure Your Legacy with an Updated Estate Plan

Divorce requires more than financial separation—it demands a complete estate plan review to prevent unintended consequences. Ensuring that your will, trusts and powers of attorney reflect your current wishes is critical to protecting your assets and loved ones.

Our boutique law firm provides comprehensive estate planning services to help you update legal documents after divorce. Schedule a consultation today with one of our experienced estate planning attorneys to secure your financial future.

Key Takeaways

  • Wills and trusts must be updated after divorce: Failing to revise estate documents may result in an ex-spouse inheriting assets or serving as executor.
  • Beneficiary designations require careful review: Retirement accounts, life insurance and bank accounts should be updated to reflect new intentions.
  • Powers of attorney and healthcare directives should be revised: Naming a new agent ensures that a trusted individual handles financial and medical decisions.
  • State laws may impact estate plan changes: Some jurisdictions automatically revoke spousal provisions, while others require updating specific documents.
  • Proactive planning prevents legal disputes: Updating an estate plan immediately after divorce helps avoid unintended consequences and ensures that assets are distributed according to new wishes.

References: Investopedia (June 25, 2024) “Rewriting Your Will After Divorce” and Justia (September 2024) Estate Planning After Divorce

Does the Way I Title My Assets Have an Impact on My Estate? – Annapolis and Towson Estate Planning

FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It is critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets do not go through probate.

Tenants in Common means there is a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner does not automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership cannot be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there is no need for probate. Community property cannot be controlled by a person’s will or trust.

Ask an experienced estate planning attorney to review your estate plan and how assets are titled.

Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

 

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