Many people choose joint ownership for bank accounts or real estate with a spouse or family member. This arrangement, especially when it includes survivorship rights, allows the surviving owner to automatically inherit the property without going through probate. It’s a straightforward process—often set up when opening an account at the bank, purchasing real estate with a title company, or even after these transactions are complete. However, the hidden risks of joint property ownership should be considered.
What are the risks you haven’t considered?
While joint ownership may seem like a simple way to streamline inheritance or avoid probate, it carries several risks that could lead to serious and unintended consequences. Before adding someone as a joint owner, consider these critical points linked to the hidden risks of joint property ownership:
1. You May Become Liable for Another Person’s Debts
When you add someone as a joint owner, their financial issues could become yours. If they face bankruptcy, have a tax lien, or lose a lawsuit, their creditors could go after the jointly owned property. For example, if you add an adult child to the deed of your home and they have undisclosed debt, your property could be seized or have a lien placed on it to satisfy that debt. Even if your share of the equity is not taken, it is little comfort if your home is sold at auction to pay off creditors. These scenarios illustrate the hidden risks of joint property ownership.
2. Your Property Could End Up with Unintended Beneficiaries
Blended families and remarriages can complicate estate planning. If you own property jointly with your spouse and you pass away, your spouse will inherit it. But what if your spouse remarries? Your home could then be shared with their new spouse. This situation becomes more complicated if there are children involved, as your property could end up going to your spouse’s new children or stepchildren, rather than to your own children as you intended. This is another of the hidden risks of joint property ownership.
3. You Could Accidentally Disinherit Loved Ones
Designating a joint owner can unintentionally disinherit other family members. If you and your adult child co-own a business and you pass away, your share automatically goes to the joint owner. Even if your will specifies that the business should be shared with your spouse or divided among all your children, those wishes will be overridden by the joint ownership arrangement. Such outcomes underscore the hidden risks of joint property ownership.
4. Selling or Refinancing Could Become a Nightmare
All joint owners must agree to sell or refinance a property. If a disagreement arises, you could be stuck in a stalemate unless you are willing to go to court to force a sale—a costly and often contentious process, especially among family members. Additionally, if your joint owner becomes incapacitated without a durable power of attorney, you might need to have a guardian or conservator appointed to represent them. This situation could complicate or even halt a property sale.
5. You Might Face Unnecessary Capital Gains Taxes
Selling a property that has appreciated in value usually results in capital gains taxes. If you add an adult child as a joint owner and then sell the property, both of you could be liable for taxes on the increase in value. This could create a significant tax burden that your child may be unable to afford. This, too, is covered under the hidden risks of joint property ownership.
In contrast, if your property is inherited, beneficiaries only face capital gains taxes based on the property’s value at the time of your death, not from when you initially bought it. For many, planning for inheritance rather than joint ownership could save beneficiaries from substantial capital gains taxes.
6. Unmarried Partners Could Trigger Gift Taxes Adding an unmarried partner as a joint owner of your home could be considered a taxable gift by the IRS. Depending on the property’s value, this could mean complicated paperwork and potentially a large tax bill.
A DOPA or parental POA allows another adult, known as an agent or attorney-in-fact, to temporarily care for your child and make decisions on your behalf. This is particularly valuable when you’re out of state or country, undergoing medical treatment, on military deployment, facing possible deportation, or even during incarceration.
While a DOPA does not take away your parental rights, it does enable the designated caregiver to make important decisions. These may include taking your child to the doctor, excusing them from school, attending school activities, accessing records, and making emergency choices. Without a DOPA or parental POA, essential care could be delayed or denied if you are unreachable, and decisions may be made that don’t align with your wishes.
Now What Should You Do?
These decisions are complex and carry significant financial and legal implications. To avoid potential pitfalls such as the hidden risks of joint property ownership, it’s crucial to consult with an experienced estate planning attorney who understands the nuances of joint ownership and can help you achieve your goals. Our team is here to guide you through the process of reducing estate taxes, avoiding legal complications, and protecting your loved ones. We take into account both the legal aspects and the delicate family dynamics involved in estate planning. Contact us today for a complimentary initial planning meeting to create a plan that provides peace of mind and secures your family’s future.
