From Our “Ask a Question” mailbag: “Jointly Owned Property with Children.”
Most recently updated on October 9th, 2019.
“I hear that it can reduce costs to put my house and bank account into my and my daughter’s name. However, she has creditor problems. Further, I don’t trust my son-in-law. Can you explain the Pros and Cons of Jointly Owned Property with Children?”
Jointly Owned Property with Children, The Good, Bad, and Ugly.
Parents are often tempted to place their property in Joint Tenancy with children. Because the child becomes a co-owner of the asset, the child can 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 essential to realize the potential pitfalls that come with joint ownership. Sometimes convenience comes at a high price.
What is Joint Tenancy?
First, let’s have a precise definition. Joint Tenancy or Joint Tenants with a Right of Survivorship is a form of ownership. In this ownership, two or more persons own property, such as real estate or a stock account. 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.
Putting your child’s name on your asset as joint tenant makes them a co-owner. As a result, you open the asset up to avoidable attacks and potential family conflicts. 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 placing accounts 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 child refuses to share with the other children.
Meanwhile, the other children say the joint tenancy for convenience. The other children say the parent wanted the asset divided equally, not to pass only to the one child.
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. A judge listens to both sides. The judge then decides if the deceased parent created the 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.
Making the child a joint tenant gives the child ownership rights. The child’s rights are now equal to the parent’s.
While the child can now 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.
Because the child is a co-owner, the child has complete access to financial accounts. We don’t like to think about it, but sometimes children can have problems. You have heard stories. Children empty a parent’s accounts because of mental health problems, gambling, and debts. Because you gave the child complete access to your account as co-owner, the child could spend all the money. You will have no recourse against the bank.
By giving the child account ownership, if the child enters into a divorce, the jointly held property could end up being drawn into the divorce litigation. The unexpected result is causing the parent unexpected expense and stress. Instead, the smart parent sets up protective Dynasty Trusts protecting the inheritance from a child’s spouse. To learn more, read my article Dynasty Trusts: Everything You Need to Know.
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, Another Option.
Rather than using joint tenancy with a right of survivorship, your estate-planning attorney can craft a power of attorney. This power of attorney gives the child the potential to assist the parent with the property. Most of these will be general powers 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. For example, 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 an agent, your child’s spouse and creditors have no controls over your accounts. Should your child enter into a divorce or bankruptcy, a power of attorney gives his spouse and creditors no authority to access your assets.
Revocable Living Trust, More Options!
Revocable Living Trusts are trusts created during your life into which you place your property. Generally, they are designed 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. Thus, 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.
For more information, follow this link to my article, Revocable Living Trusts, All You Need to Know.
Conclusion, Jointly Owned Property with Children in Estate Planning:
While joint tenancy with a right of survivorship is a valuable tool for estate planning, use this power wisely. Recognize potential complications. Developing an estate plan requires that your estate planning attorney understand how you own all your property. Only then can your plan avoid being unexpectedly thwarted outside of the will.
More Planning Questions?
If you have more estate planning questions, please read my more detailed article, Estate Planning, Everything You Need to Know.
In this article, I tried to address Jointly Owned Property with Children in Estate Planning. Further, I included links to even more detailed information on my website. So, let me know how I did, comments, and questions are welcome! I hope it helped!
If you have more questions about wills and estate planning, let our Philadelphia County Estate Planning Lawyers help walk you through the confusing process. Our lawyers are ready to answer your questions. Feel free to contact our office for a free consultation.