Joint Ownership as an Alternative to Estate Planning (Part 2)

Blog Post by Melissa Platt, Esq.

It’s finally here—the long-awaited second installment in this two-part article on joint ownership! As a brief refresher, we’re talking here about the serious unintended consequences of using joint ownership (to be technical, joint tenancy with rights of survivorship or JTWROS) as a replacement for estate planning.

Example: Mom adds the name of trusted adult Son to her checking and savings accounts to allow Son access to these accounts to pay bills. Mom and Son have an understanding that when Mom dies, Son will distribute the money in the accounts to all the siblings equally. (Or Mom could also add Son’s name to the title of her home, CDs, money market accounts, brokerage accounts, etc.)

In last month’s installment, we looked at Problem #1 of using joint ownership as an estate plan replacement: it can increase (sometimes significantly) the capital gains tax you owe Uncle Sam. Now, let’s look at some of the other potential problems.

Problem #2: Gift Taxes

When two people jointly own property and one owner dies (for our purposes, the parent), the property automatically becomes the full property of the surviving owner (the child). In the eyes of the law, the child is the sole owner, and while he may have a moral obligation to share the property equally with his other siblings, he is under no legal obligation to do so. So, any distributions he makes to siblings will be considered completely voluntary and therefore a gift. Currently, gifts above $13,000 per year per recipient are subject to gift taxes at a 45% rate (although this is where things get a little tricky because the law has two exemption levels for estate and gift taxes).

For some families, the value of property to be distributed is safely under these limits. But, in other cases, this arrangement can cause major adverse tax consequences to the child who was made a joint owner on the property.

Problem #3: Disability Planning v. Death Planning

Joint ownership will transfer ownership of property upon death, but what happens when an owner is disabled? (“Disability” could mean a mental disability, or a physical disability so severe it leaves the person unable to sign anything.) When property (including real property, stocks, brokerage accounts, etc.) is jointly owned, both owners’ signatures are required to sell, assign, mortgage, lease, or transact any other business with that property. (Joint bank accounts that only require one signature to sign checks or make withdrawals are the possible exception to this rule.)

If one of the joint owners is disabled, any transactions involving the jointly owned property will have to be approved by a probate court.

So called “living probate” can be very costly, time consuming and cumbersome. The process starts with the filing of a petition with the probate court and the payment of a filing fee (currently $360). The petition (which becomes part of the public record) to have the alleged disabled person declared incapacitated can be filed by any person interested in the disabled person’s welfare. The probate court will require that the alleged disabled person be examined by one or more physicians who are willing to certify that the person is in fact disabled. The costs of these examinations are paid by the alleged disabled person. The person who files the petition will have to hire an attorney, and an attorney will also be appointed to represent the alleged disabled person. These costs are also paid by the alleged disabled person.

Then, the person appointed as guardian of the disabled person will have to file accountings with the court every year detailing the assets at the beginning and end of the reporting year, income received during the year, disbursements for the support of the ward, and other expenses. The guardian must also report the physical conditions of the ward, the place of residence, and a list of others living in the same household to the court. Joint ownership doesn’t address the disability issue.

Problem #4: Lawsuits, Divorce, Bankruptcy

When a child’s name is added to the title of property, the child becomes a current legal owner of the property. So, if the child is sued (for any number of unforeseen reasons—for example, negligence in a car accident or in his occupation), is involved in a divorce, or declares bankruptcy, the parent’s property may be used to pay the plaintiff, ex-spouse, or creditors.

Problem #5: Moral v. Legal Obligation

Like I said before, a child who jointly owned property with his parent may have a moral obligation to distribute the property according to his parent’s wishes, but he has no legal obligation to do so. And that’s the problem. If the “trusted” child decides to keep the property all to himself, the siblings have no recourse against him and are left out in the cold.

Problem #6: Medicaid Planning

Did you know the average cost of nursing home care in Utah is over $4,300 a month? At that rate, any extended stay in a nursing home could devastate a person’s life savings, and leave them needing to qualify for government assistance like Medicaid. If a parent gratuitously adds a child as a joint owner on property, the law may consider that transfer of property to be a gift. And transfers of property within 5 years of applying for Medicaid will likely be grounds for denial of the application, leaving the children to bear the costs of nursing home care themselves.

To sum it all up, joint ownership as a “cheap” alternative to estate planning is fraught with traps for the unwary which may end up costing your family more time and money in the long run.