Estate Planning isn’t as easy as Joint Ownership

Joint Ownership and Your Estate Plan

Having a proper estate plan is critical, yet people often procrastinate and either set it up poorly, or worse, not at all.  After all, who wants to think about dying?  However, it is helpful to understand the purpose of an estate plan, which is to simplify the administration of one’s estate, minimize probate fees, and, most importantly, ensure that your property passes to the intended beneficiaries.  Placing non-registered assets and real estate into Joint Ownership with Right of Survivorship is one of the most common methods to accomplish this; however there are some alarming disadvantages that often are not considered when setting this up and by then it is too late.  

“Right of Survivorship” is as it sounds: on the death of one of the asset holders, the ownership transfers into the surviving owners’ hands without having to go through a Will.  Sounds simple right?  It accomplishes the goal to reduce or eliminate probate, simplifies the administration, and directly passes the assets to the hands of your beneficiaries.  This is a common strategy used by the majority of married couples, and is a successful and practical tool.  

So where can Rights of Survivorship go wrong?  It is becoming a common practice with parents and their children, and most often after the passing of one parent.  While the intent is usually to try to reduce or eliminate probate, and simplify administration, there are several potential pitfalls to be aware of:

  1. Income Tax – both the parent and the child could have negative tax implications resulting from this strategy.  The parent because the portion of interest in the property transferred to the child is deemed to have been sold at fair market value, and as a result any capital gains would be added to the parent’s income.  Furthermore, any future capital gains would accrue to the child for their share.   Worse yet, if the property is the principal residence of the parent, the principle residence exemption would not apply for the child’s share of any future increase in value of the home if they don’t share the same address.  
  2. Loss of Control – once established you can’t later cancel. When dealing with real estate you are then unable to sell the property without the consent and signature of your child (or children).  
  3. Creditors – as a result of the transfer you have exposed the asset to the creditors of the new owner if they get sued or file for bankruptcy.  If the new joint owner is married, the asset could be subject to an equalization claim in the event of a marriage breakdown.
  4. Blended Family - many families in this situation will own property together as joint tenants and have children from a prior marriage.  Wills are drafted that state that the property passes to children of both spouses on the death of the last of them.  On death of the first spouse the assets become the sole property of the surviving spouse, and they have the ability to change their will, and can remove the deceased spouse’s children as beneficiaries. 

To further complicate matters, it is important to distinguish between a true joint ownership arrangement, and a resulting trust.  Often individuals register assets in joint ownership for convenience purposes with no intent to convey beneficial ownership to the individual, which is required in order to eliminate probate fees on the asset.  

If it is deemed that the deceased did not give beneficial interest in the transferred asset to the joint owner, then a resulting trust exists and probate applies.  Documenting intentions is therefore an important step to clarify whether the transfer was meant as a gift or to be held in trust.
Estate planning is an important piece of your financial plan, and the proper care should be taken. Joint ownership is becoming increasingly complicated and is not a simple and easy way to transfer wealth and avoid probate.  While it might be appropriate between spouses, it is generally not recommended in other situations.  

At Insightful Wealth Group we work closely with our clients to establish a comfortable and thorough estate plan that works for each individual situation.  A complete financial plan doesn’t just involve your investments; it is an integrated process that includes risk management as well as tax planning, investment counseling and estate planning. Our team is here to help you determine the best Estate Plan for you and your family.