Wanting to pass property quickly and efficiently to a loved one, especially a non-spouse loved one is a goal common to many. Perhaps you wish to guarantee that your vacation home remains in the family, or you want your bank or brokerage account to pass to your son or daughter, avoiding the probate process completely. In both cases, a common alternative is the use of joint ownership with the right of survivorship. At first glance, having joint ownership may seem like a good way to accomplish your goals, but before you use this solution, consider some potential risks.
One clear and popular benefit of using joint tenancy with rights of survivorship is that upon one owner’s death, his or her share is automatically transferred to the surviving owner free of the cost and delay of probate. But, what makes joint ownership with the right of survivorship so popular can also make it dangerous because it gives each owner an equal undivided interest in the entire property, bringing with it the potential for some pretty negative consequences.
With an equal undivided interest in the property, each owner is entitled to full use of the property and to his or her share of any income it produces. When you create a joint ownership arrangement, you may be giving up full control. For example, if you desire to sell or refinance your property after naming a new joint owner, the new joint owner must give his or her approval. Even more troubling, if a joint owner were to be sued, or otherwise find themselves in financial trouble, he or she or their creditors could force a sale of the property and receive the proportionate share of the property’s value. Therefore, caution should be taken when titling a bank or brokerage account in joint ownership, especially with non-spouse owners.
Trying to name an alternate beneficiary for joint property in your will also will prove frustrating. Remember, the property will pass to the joint owner outside the probate process and the directions of the will. If you decide you want someone else to inherit the property, you may need the current co-owner’s approval.
A possible solution would be to, instead of placing property in joint ownership, consider a revocable living trust. You are able to name the person you want as beneficiary, and that decision is revocable at any time. A Transfer On Death agreement also may address the desire for efficient transfer to beneficiaries and retain the same beneficial qualities of joint property. A Transfer on Death agreement affords the owner the ability to designate who the brokerage account assets will pass to and by-passes probate, but does not expose account assets to the problems.
Another common misconception with joint ownership with the right of survivorship property is that it will lower estate taxes. This is not true. The value of the property is included in the taxable estate in proportion to ownership and exposed to tax. The first-to-die’s estate will be taxed on the share of the property that he or she actually owns and, for this reason, it is important to keep records of the funds each person contributes.
The titling of property in joint ownership could also expose you to a gift tax consequence, depending on the type and value of the property. There are exceptions such as bank accounts, securities held in street name and savings bonds. These transfers are taxable gifts only when the gift becomes complete, occurring when the newly named co-owner exhibits ownership over the property.
So while the titling of property as joint ownership with the right of survivorship might seem like a quick and efficient way to accomplish ones goals, it is not without the potential for significant negative consequences. Additionally, as noted, there might be better alternatives that will still accomplish goals. Before implementing joint property or any significant financial planning strategy, contact and consult with your financial planner or attorney.
Michael T. Ohlman, a certified financial planner, is a senior vice president, financial planning, and a wealth management specialist in the Bradenton office of Raymond James & Associates, Inc. He can be reached at (941) 907-0168 or Michael.Ohlman@RaymondJames.com.