As parents age, families sometimes struggle with how to best keep their parents’ financial affairs in order. One common approach is for aging parents to put one or more of their children on their investment accounts, bank accounts and real property.
Parents putting children or other family members as joint owners of their assets is another example of a simple solution for a complex problem. It doesn’t work, even though it seems as if it should.
As explained in the article “Beware the joint tenancy trap” from Monterey Herald, putting another person on an account, even a trusted child or life-long friend, can create serious problems for the individual, their estate and their heirs. Before going down that path, there are several issues to consider.
When another individual is placed as an owner on an account or on the title to real property, they have a legal ownership in that property equal to that of the original owner. This is called joint tenancy. If a child is made a joint tenant on a parent’s accounts, they would be entirely within their rights to withdraw every single asset from those accounts and do whatever they wanted with them. They would not need the original owner’s consent, counsel, or knowledge.
Giving anyone that power is a serious decision.
Making a child a joint owner of assets also exposes those assets to claims by the child’s creditors. If they file for bankruptcy, the original asset owner may have to buy back one-half of the asset at its current market value. Another example: if the child is in an accident and a judgment is recorded against the child, you may have to buy back one-half of your joint tenant property at its current market value to settle the claims.
There are other complications. If one joint owner of the asset dies, joint tenancy provides for the right of survivorship. The property transfers to the surviving joint tenant without going through probate and with no reference to a will. That’s what people focus on when they try this method as an end-run around estate planning. What they don’t realize, is that if the parent dies and the asset transfers directly to the joint tenant—let’s say a daughter—but the will says the assets are to be split between all of the children, her claim on the asset is “senior” to the rest of the children. That means she gets the assets and the four siblings split the remaining assets.
If there is any friction between siblings, not having equal inheritances could create a fracture in the family that can’t easily be resolved.
Tax exposure is another risk of joint tenancy. When someone is named a joint owner, they have an equal ownership interest in those assets, as the original owner’s cost basis. When one owner dies, the remaining owner gets a step up in basis on the proportion of the assets the deceased person owned at death.
Let’s say a son and father are joint owners on an account. When the father dies, the son gets a step up in basis on one-half of the assets—the assets that the father owned. His half of the assets retains the original basis. But if that account was owned solely by the father, all the heirs will get the full step up in basis on the father’s death.
Given the complexities that joint tenancy creates, parents need to think very carefully before putting children’s names on their assets and real property. A better plan is to request a consultation to speak with one of our estate planning attorneys and find out how to protect the parent’s assets through other means, which may include trusts and other estate planning tools.