Many people think that owning assets jointly with a child or other heir is a simple and effective way to plan their estate. But this strategy may not be as smart as it seems. It can cause more problems than it solves, and it may end up costing you and your child more in taxes, fees, and risks.
The pros and cons of joint ownership
Owning an asset — such as a house, a bank or brokerage account, or a car — with your child as “joint tenants with right of survivorship” means that when you die, the asset automatically passes to your child. You don’t need to use any other estate planning tools or go through the probate process.
But this also means that you give up some important benefits and expose yourself and your child to some serious drawbacks, such as:
- Potential estate or gift taxes: If you add your child to the title of property you already own, the IRS may treat it as a gift of half the property’s value. And when you die, half of the property’s value will be counted in your estate for tax purposes.
- Lower income tax basis: As a joint owner, your child won’t get the full benefit of the stepped-up basis that applies to assets transferred at death. This means that your child may have to pay more capital gains tax if he or she sells the asset later.
- Creditors’ claims: As soon as your child becomes a joint owner, the property is subject to the claims of the child’s creditors. If your child gets sued, divorced, or bankrupt, you may lose part or all your property.
- Loss of control: Adding your child as an owner of certain assets, such as bank or brokerage accounts, allows him or her to withdraw or spend the money without your permission or knowledge. And joint ownership of real property prevents you from selling it or borrowing against it without your co-owner’s consent.
- Unintended consequences: If your child dies before you, the assets will go back to you alone, and you will have to find another way to pass them on to your other heirs.
- Unnecessary risk: When you die, your child inherits the property right away, regardless of whether he or she is ready and able to manage it.
A better alternative: Trusts
You can avoid or reduce these problems by using one or more trusts that are designed to meet your specific needs and goals. Trusts are legal entities that allow you to transfer assets to a trustee, who manages them for the benefit of your beneficiaries. Trusts can offer many advantages over joint ownership, such as:
- Flexibility: You can customize the terms of the trust to suit your wishes and circumstances. For example, you can specify when and how the assets will be distributed to your beneficiaries, or you can retain the right to revoke or amend the trust during your lifetime.
- Protection: Trusts can shield your assets from creditors, lawsuits, divorce, and other threats. Trusts can also protect your beneficiaries from their own financial mistakes or bad habits, by imposing conditions or restrictions on their access to the trust funds.
- Tax savings: Trusts can help you reduce or eliminate estate, gift, and income taxes, depending on the type and structure of the trust. Trusts can also take advantage of the stepped-up basis rule for assets transferred at death, which can lower the capital gains tax for your beneficiaries.
- Privacy: Trusts are not public records, unlike joint ownership or probate. Trusts can keep your financial affairs and personal information confidential and avoid unwanted publicity or interference from outsiders.
HoganTaylor Estate Planning Services
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.