Parents are often tempted to place property in Joint Tenancy with children. Because the child becomes a co-owner of the asset, the child is able to have easy access to the account to help the parent pay bills and manage the asset. Further, at the parent’s death the asset automatically passes outright to the child. While this type of ownership might first appear convenient, it is important to realize the potential pitfalls that come with joint ownership. Sometimes convenience comes at a high price.
First, let’s have a clear definition. Joint Tenancy or Joint Tenants with a Right of Survivorship is a form of ownership where two or more persons own property, such as real estate or a stock account, and during these owner’s lifetimes they own whatever share in the asset that the agreement reflects, but they have a binding agreement that upon the death of one owner the surviving owner has the right to claim the deceased owner’s share.
Because putting your child’s name on your asset as joint tenant makes them an owner of the asset, you have opened the asset up to avoidable attack and potential family conflict. Let me give you a list of potential pitfalls of making your child a joint tenant with a right of survivorship:
Matter of Convenience vs. Intent to Make a Gift: Much litigation arises from accounts being placed in joint tenancy. The problem comes when the parent dies and the child who is joint tenant exercises the ability to claim the account. The other children say that the account was put into joint names for convenience, and the assets should be divided equally between all children. The child with the joint ownership says the account was made into joint tenants with a right of survivorship because the parent wanted that child to have the entire account at the parent’s death. Who is right? Only the dead parent knows, and the parent is no longer around to tell us the answer. Now the matter ends up in court where a judge listens to both sides and makes a determination about whether the account was made into a joint tenancy for convenience or as a method to get the surviving joint tenant all the assets at death. This litigation is expensive and tears the family apart.
Child’s Creditors: Because the child is made a joint tenant, the child now has ownership rights over the account equal to the parent. While the child can now easily help with writing checks or making investments, the child’s creditors can now claim against the account for unpaid debts. The problem only gets worse if the child should ever file for bankruptcy.
Child’s Access: Because the child is a co-owner the child has complete access to financial accounts on which the child has been made joint tenant. We don’t like to think about it, but sometimes children can have problems; mental health, gambling, and debts being the common culprits. Because you gave the child complete access to your account as co-owner, the child could spend all the money in the account and you will have no recourse against the bank.
Child’s Spouse: By giving the child an ownership in the account or the real property, if the child enters into a divorce, the jointly held property could end up being drawn into the divorce litigation, causing the parent unexpected expense and stress.
Inheritance and Estate Taxes: Because the child now has an ownership interest in the joint property, if the child dies before the parent, the parent is regarded as inheriting the child’s share back. This reverse inheritance could cause the parent to pay inheritance or estate taxes.
Thwarting the Will: The parents may have a well-drafted will created in concert with an estate-planning attorney. The will might create protective trusts for the child, to help shelter the parent’s gift to the child at death from the child’s creditors and spouse. By putting the asset into joint tenancy, this property instead passes directly to the child outside of the protective trusts, thwarting a well crafted estate plan.
Alternatives to Joint Tenancy with a Right of Survivorship: Rather than using a joint tenancy, other options might address your goals while precluding the problems and pitfalls associated with a joint tenancy.
Powers of Attorney: Rather than using joint tenancy with a right of survivorship, your estate-planning attorney can craft a power of attorney, giving the child the power to assist the parent with the property. Most of these will be general power of attorneys, granting the child broad powers to address a broad spectrum of matters. You could also have your estate planning attorney craft a special power of attorney with very narrow terms addressing only one issue, such as writing checks on one of your checking accounts. Most financial institutions also have preapproved special powers of attorney, crafted to apply only to that institution’s accounts. A power of attorney makes your child your agent, but as agent your child’s spouse and creditors are given no powers over your accounts. Should your child enter into a divorce or bankruptcy, the power of attorney gives his spouse and creditors no power to access your assets.
Revocable Living Trust: Revocable Living Trusts are trusts created during your lifetime into which you place your property. Generally they are created to avoid probate, but can also help a parent in need of a child’s assistance. The child can be made a co-trustee along with the parent, so the parent maintains control, but the child can step in to help. Because the assets are owned by the parent’s revocable trust, not by the child as a joint owner, the child’s creditors and spouse have no claim to trust assets.
While joint tenancy with a right of survivorship is a valuable tool for estate planning, it must be used wisely and with awareness of potential complications. Developing an estate plan requires that your estate planning attorney understand how all your property is owned so that the plan being crafted is not unexpectedly thwarted outside of the will.
Wills, Trusts and Estates, It’s All We Do!