Excuse #2 – Joint Ownership With My Child Is Sufficient


Note:  This is Excuse #2 of 5 in our important series, “5 Excuses that can Devour Your Estate & Destroy Your Family”.  To read Excuse #1, click here.

Every distraught mother in the world is right.  “Just because your friends jump off a bridge, doesn’t mean that you should!”  You’ve heard it.  I’ve heard it.  We’ve all heard these colorful words at one time or another when we were foolishly following the wrong crowd and headed towards trouble.  Please allow me to be your mother’s voice of reason for a moment.  “Just because it is common for everyone to name their child as a joint owner of a house or other property to dodge estate troubles, doesn’t mean you should!”  It’s “Risky Business”, like the Bette Midler movie by the same name.  Everything that can go wrong – probably will.

The Merriam-Webster Collegiate Dictionary defines the word “probate” as “the act or process of proving before a competent judicial authority that a document offered for official recognition and registration as the last will and testament of a deceased person is genuine”.

If you’re human, just the thought of probate probably makes your hair stand on end.  The war stories about how time consuming, costly and embarrassing it is (since all your personal laundry is hung out to dry in court for the world to see) are too numerous to count.  So, it only makes sense that people will do whatever it takes to avoid it.  One of the most common ways of avoiding probate is naming a child as joint owner of things like a house, a piece of land or a bank account.  Big mistake.  You should run as fast as your little legs can carry you and here is why….

Generally speaking, you could probably sidestep probate woes fairly easily with a joint ownership agreement in combination with a joint bank account; but easy isn’t always best.  (Yes, I know I sound like your mother again, but she’s actually pretty smart.)  There’s the good side and the bad side to everything, a joint ownership agreement is no different.  Imagine this…

Let’s say you’re a sole surviving parent who has placed your oldest son on the deed to the family home as a “gift,” along with a couple of other financial accounts with the understanding that John will split everything up evenly with the other siblings when you pass.  No problem, right?  John can be trusted.  The kids love each other, so everything will be fine!  If you believe that one, I’ve got some swamp land I’d like to sell you down in Florida.  If Joe happens to drive through John’s new garage during a fun night out on the town together before John has a chance to update his homeowners policy, and Joe has no money to pay for it, you’d be amazed how quickly John can reconcile his right to leave Joe empty handed when momma’s gone.  We human beings have a funny way of viewing things that have a negative impact on our wallet.

Let’s say for the sake of argument that I’m just a cynical old attorney.  John would never do that.  Fine – backspace and delete.  Now, we have perfect John in charge.  He’s always been a “good boy” and a great older brother to Joe and Jane.  John wants nothing more than his fair share.  He’s determined to divvy everything up equally with Joe and Jane to the dot of the “i” and cross of the “t”.  To which I say,
“Good luck!”

What if the sole surviving parent becomes incapacitated and has zero input or control over the accounts, or needs the money for his or her care.  Once you put a name on an account you have made a gift to that person and they can do with it anything that they desire.  However, if you put that same asset in a revocable trust, it still belongs to you, yet if you are incapacitated, your children will have access to it only if you need it.

Another thing we must consider is the tax burden that John will bear as a result of being co-owner of the home.  If you “gift” half the property to John, upon your death only one-half of the property will be stepped up.  John will not get a “stepped-up” basis on his half of the house.  For example:  if you bought your home for 100,000, this is your basis.  If you die owning the home and it is now worth 200,000 your estate now has a basis in the home of 200,000.  If your heirs want to sell the home after your passing, there will be no capital gains.  On the other hand, if you put John’s name on the home as joint tenant.  Only your half will step up to the date of death value (your basis =100,000).  John will still have a basis in the home of 50,000 so if he goes to sell it for 200,000, he will report a capital gain of 50,000,  (200,000 – 150,000 =50,000).  He will end up paying taxes on the gain.

Once you cross over to greener pastures, John would automatically become the sole owner of the family home and financial accounts.  He can do whatever he wants to with them – even if you said differently in a will! Many people are unaware that the joint ownership agreement supersedes a will.  You may have done an excellent job of outlining how you want the assets divided up between the kids but, once you’re gone, John is in charge.  Again, I’m sure you feel he will do the right thing.  Every parent does.  I can only tell you what I’ve experienced.  This approach runs the risk of creating serious discord in an otherwise loving family for years (sometimes generations) to come.  Why take that chance?  That’s the last thing any parent wants for their children.

Speaking of things not going as planned, let’s not forget about divorce, or an accident, or some other catastrophic incident that may leave John’s portion vulnerable and exposed.  Life happens.  Laws vary from state to state, of course.  Lady Luck is on your side around divorce if your state law dictates that the family home was a gift to John, so Susie can’t touch it if things go south.  If not, there’s potential for trouble.  Likewise, if John isn’t as good with money as you thought, predators – I mean, creditors – can go after John.  Again, their success will be based on your state laws, but you get the idea.  It’s still going to be a costly battle and John’s poor choices will have a direct impact on Joe and Jane.

Sometimes people think that joint ownership will provide the funds they need down the road for a nursing home or assisted living facility.  Unfortunately, most states will drain you dry before Medicaid (Medi-Cal in California) will kick in.  Medicaid is a federal law, but each state puts its own spin on things.  Every state will ask you about transfers you’ve made in the last three years and there will be penalties.  Let’s say John’s half of the brokerage account is a $250,000.  There is a formula that the states use to determine the penalty period for a gift of $250,000 to determine exactly how long the state will declare you ineligible if they have their way.

Take heart!  There are alternatives.  There’s always the exception to every rule.  There’s a way to protect your assets along with legal ways to avoid probate, inheritance taxes and hardship on your children’s relationships with each other.  There’s a plan that’s right for YOU and your family – and a good estate planning attorney can help you create and maintain it so your assets, and your children’s relationship with one another, will thrive for years to come.

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