top of page

Joint Ownership versus Beneficiary Designations

Adding a child as a joint owner (either to real property or financial accounts) is a very common "DIY" estate planning tool. While joint ownership (if done correctly) does avoid probate, and passes ownership of the asset to the surviving joint owner upon the death of the first joint owner, there are several potential pitfalls.

To help illustrate some of the pitfalls, let's consider a hypothetical family consisting of parents Marie and Frank, and their two sons, Raymond and Robert.

  1. Joint Owner is Entitled to Entire Asset. A joint owner is generally entitled to the entire jointly owned asset, even if that joint owner contributed nothing to the ownership of the asset. So, if Frank and Marie were to sign a deed adding their sons Raymond and Robert as joint owners of their home and were to sign documents at their bank adding both Raymond and Robert as joint owners of their bank accounts, theoretically, Raymond could go to the bank and withdraw all of his parents' cash on hand because he is a joint owner. Similarly, Robert could either force the sale of his parents' home and/or evict his parents, depending on the circumstances, and retain a portion of the proceeds from the sale of the house. Joint owners have a great deal of (usually) unintended power over the jointly owned asset. Most parents don't consider this potential when adding a child as a joint owner, assuming that the joint owner will not have any control over the asset until the parents die.

  2. Joint Owner Does Not Share With Other Heirs. Adding one joint owner means that the asset will pass solely to that joint owner to the exclusion of any other children. Using the example above, if Frank and Marie only added Raymond as a joint owner of their bank account, Raymond alone has access to that account (and would become the outright owner of the account if his parents predeceased him). Robert would have no interest in that account, nor any right to any portion of that account upon the death of his parents. Most parents assume that their children will "do the right thing" and divide assets evenly upon death, but there is no legal requirement for a joint owner to do so. Even if the joint owner does decide to share in the proceeds of that account, there may be gift tax consequences. For example, if Frank, Marie and Raymond are joint owners of a bank account with $100,000.00 at the time Frank and Marie die, and Raymond decides to split that account with Robert because it is what his parents would have wanted, Raymond could potentially be making a taxable gift to Robert, meaning that he may have to file a gift tax return and potentially pay tax on that gift.

  3. Divorce or Bankruptcy of Joint Owner. If a joint owner gets divorced or files for bankruptcy protection, jointly owned assets could potentially be at risk in the divorce or bankruptcy proceeding. The general logic there is that if a joint owner has access to and control over the asset, it should be available for a soon-to-be ex-spouse or the creditors of the joint owner. So, if Raymond is a joint owner with Frank and Marie of an investment account, and Raymond's wife files a divorce action, Frank and Marie might stand to lose some of their investment account before that divorce becomes final. Or, if Frank and Marie own their home jointly with Robert and Robert files for bankruptcy protection, Frank and Marie's home could be considered an asset subject to the bankruptcy. In each instance, there may be tax consequences associated with the joint ownership and liquidation of assets to satisfy these creditors.

  4. Potential Federal Benefit Consequences. For those individuals receiving any sort of governmental benefit (such as Medicaid or disability benefits), joint ownership of an asset could potentially jeopardize those benefits. Most governmental benefits have very strict limits on the amount of assets a person can own, and most consider jointly owned assets to be 100% available to all joint owners. So, if Raymond was receiving Medicaid and he was added as the joint owner of Frank and Marie's bank account that had more than the applicable asset threshold, he could potentially lose those Medicaid benefits (and, removing him as a joint owner after the fact could result in additional penalties).

There are other estate planning tools available, however, which can also achieve probate avoidance and pass ownership of assets to future generations very effectively, including:

  1. Beneficiary Designations. Both real property and financial accounts can identify beneficiaries who only take ownership of assets following the death of the original owners. So, if Frank and Marie want to leave all of their assets evenly to their two sons, they could sign a Lady Bird Deed leaving the home to Raymond and Robert after their death, and they could add both Raymond and Robert as equal beneficiaries on any financial accounts. Any beneficiary designation avoids probate, but does not pass any ownership interest in the asset until the original owner dies. Generally, beneficiary designations result in the beneficiary getting ownership of the asset simply and quickly

  2. Trusts. Trusts are another tool that allow the original owner to maintain full control over the assets held in the Trust, and then distribute those assets to the Trust beneficiaries upon the death of the original owner without probate involvement. Trusts generally make sense when there is some reason that the beneficiary should not receive an asset outright upon the death of the original owner (including, but not limited to situations where there are beneficiaries with special needs, when a person owns a business, or when there are minor children involved).

Although joint ownership is a very effective way to pass assets to future generations, setting up that joint ownership incorrectly can have significant unintended consequences, which could far outweigh any "savings" associated with this DIY estate planning tool. If you are considering naming a joint owner for any asset, contact Lumbertown Law today for a free estate planning consultation to discuss alternatives that can achieve the same results without the risks of joint ownership.

Post: Blog2_Post
bottom of page