By Linda Graham, Partner
Joint tenancy allows two people to have equal access and ownership of the entirety of a property or account. Joint ownership of real property or an investment account with a spouse is often appealing because it the survivor automatically inherits the asset without the need for probate. What works well between husband and wife, however, is frequently disastrous between a parent and child. Here are some potential pitfalls of joint ownership:
Can joint tenancy help you avoid Probate? Sure. But you it is often surprising to learn that one co-owner’s debts frequently become the other’s responsibility. If the joint owner files bankruptcy or runs into other financial trouble, creditors frequently make claims against the co-owner’s property. Many families learned an expensive lesson during the last recession when children went into bankruptcy related to loss of employment. This resulted in parental liability for the debts of the children.
Adding a child as a joint tenant frequently created family tension. What is done for convenience frequently ends up transferring extremely valuable assets to the child. If a parent has several children but only chooses one to serve as a joint account owner, when the parent passes away, the account in questions automatically belongs only to that child. When someone is designated as a joint owner of an account, control is fully transferred to them in the event of a co-owners death. The co-owner becomes the sole owner regardless of any provisions in a will.
Currently a surviving heir receives forgiveness of capital gain on appreciated value of assets. So in the event that someone’s home increases from $50,000 to $250,000 over the years, the IRS will forgive the $200,000 increase for the receiving heir. In contrast, adding a joint owner during the mother’s lifetime results in a 50% transfer penalty. So a $100,000 portion of the gain is not forgiven if your mother added a joint tenant.
While one can argue that the transfer is a gift, this approach is also problematic. The transaction of adding a person to a deed without financial contribution toward the value of the property is considered a gift. This frequently makes the transaction liable for a gift tax.
Transferring property within 5 years of applying for Medicaid results in disqualification. Transferring the house into a joint tenancy, is often still a transfer. This often results in eliminating eligibility for Medicaid benefits for a period of time. This is a transfer penalty. In many states, the home is exempt for Medicaid eligibility purposes. However, in the event of transfer into joint tenancy, it often loses its exemption, and its value can prevent Medicaid eligibility. Because most homes are still so valuable, this means most people will no longer be eligible for Medicaid.
In summary, minimal use of joint tenancy is far safer and typically leads to far fewer problems. Please be conscious of these risks when making titling decisions, or speak with an experienced estate planning attorney before changing the title of your property.
Posted in: Estate Planning