No matter how many people I meet with to create estate plans, undoubtedly we talk about how to avoid probate (having to go to court to get access to property when someone dies) and how to make sure your assets are accessible if you become incapacitated. A relatively simple way to accomplish both of those goals is to own assets jointly with another person. The joint owner is typically a spouse or an adult child.
Joint ownership can, however, have many implications, not all of which are good.
The Good
Establishing joint ownership of a financial account is relatively easy. Simply go to the bank with the person you want named as the joint owner and sign some paperwork. It’s easy to do, and you do not have to pay an attorney to help.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Once added, the joint owner becomes a legal owner of the property, and you both have the same rights to access and control the property. In addition, the joint owner will typically receive the property directly upon your death. This is known as a survivorship right. Even better is that the joint owner will be able to manage the account if you become incapacitated, or if you just want some help, for example, to pay your bills.
The Bad
Joint ownership can help with access if you become incapacitated and with avoiding probate if you die, but there are also some pitfalls to consider before adding someone’s name to property.
If your joint owner gets sued or divorced your account is potentially at risk. Because the joint owner’s name is on the account, you may have to prove the money is yours. Even then, it might not be possible to save the account from a creditor.
If the joint owner’s creditor issues are bad enough, he or she might declare bankruptcy to alleviate their debts. In this situation you might have to deal with a bankruptcy trustee attempting to access your account to pay off the debts.
The Ugly
Sometimes a joint owner’s direct actions can be the cause of the problem. A joint account owner has complete and unfettered access to the account and could withdraw all the assets from the account at any time. To you, the joint owner is taking out your assets without your approval — or stealing. From the bank’s point of view, however, an owner is making a withdrawal. For this reason, it is extremely important that you implicitly trust anyone you name as a joint owner.
The Ugliest
Joint ownership also has the potential to cause problems when it comes time to settle an estate. Because joint ownership brings with it right of survivorship, when one joint owner dies, the surviving joint owner immediately receives the property. Basically, the account belongs to the surviving joint owner.
Many people put an adult child’s name on account not because they want that one child to inherit the account to the exclusion of the other children, but because that one child lives close by or is the most helpful. This type of situation is known as joint ownership for convenience. Typically, if the arrangement is for convenience, the child whose name is on the account should not inherit to the exclusion of the other children. Rather, the account should pass as described in your will.
However, after you are gone, it may be difficult to know (or to prove) your intentions. The joint owner/child might say that you intended she inherit the account for all the help provided. The other children might expect to receive part of the account. If the account is large enough, the siblings might decide to fight about it and each hire an attorney. Even if they do not fight about it, resentments can be sown that will last for years or even longer.
It’s best to be careful, because your relatively easy and inexpensive solution of putting your children’s names on the account could result in family animosity and fighting for years to come. It’s possible to state in your will your intentions regarding the account — that it was established solely for convenience. However, most people fail to do so.
What to do?
The solution to these issues is to work with a qualified estate planning attorney to create an estate plan to accomplish all your goals. Revocable trusts can be an excellent way of avoiding probate. A trust gives someone access to assets if you become incapacitated, and then fairly divides the assets in an inheritance. Yes, trusts are more expensive to implement than going to the bank and adding a name on an account. They also require you to work with a good attorney.
Consider a good estate plan like a good investment or an insurance policy — you spend some time and money setting it up, and the dividends in the form of cost saving and family harmony are reaped later when you become incapacitated or die. Moreover, your family will reap the benefits for decades to come.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
-
-
401(k) Plans: 10 Things You Should Know
Retirement When it comes to 401(k) plans, it's your money. But your boss and the government make the rules. 10 things you should know.
-
Lawmakers Propose Tax Hikes to Combat Climate Change
Climate change is prompting some lawmakers to propose property tax hikes to fund mitigation efforts while scientists say that global warming could reach a critical level in less than a decade.
-
I Wish I May, I Wish I Might: Estate Planning’s Gentle Nudge
Contrary to what you might expect, using precatory language such as ‘I wish’ or ‘I hope’ can play an important part in three estate planning objectives.
-
Investors Nearing Retirement Show Patience With Markets
Despite last year’s upheaval, many investors are sticking with long-term plans and tightening their budgets instead of moving money out of stocks and bonds.
-
Long-Term Care Planning vs. Taxes: Finding a Healthy Balance
Many families discover that trying to mitigate the cost of long-term care can conflict with another common retirement concern — reducing taxes for retirees and their heirs.
-
For a Concentrated Stock Position, Ask Your Adviser This
There can be advantages to having a lot of stock in one company, but ‘de-risking’ can help avoid some significant disadvantages.
-
Trusting Fintech: Four Critical Moves to Protect Yourself
A few relatively easy steps can help you safeguard your money when using bank and budgeting apps and other financial technology.
-
Four Ways Women Can Take Control of Their Financial Health
Adjusting for life events, taking advantage of workplace benefits and preparing for caregiving can make a big difference in your financial future.
-
Long-Term Care Insurance Quandary: Keep Paying or Let It Go?
As long-term care insurance premiums go up, many policyholders are struggling with what to do. Accept higher premiums, reduce benefits, let the policy lapse or take a payout?
-
Four Steps to Prepare Your Finances for Divorce
Divorce is rarely easy, but getting financial paperwork in order, working with professionals and making tough decisions now can take some of the stress out of it.
