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Know the Law: Drawbacks to Owning Property Jointly

Written by: Linda R. Garey

Published in the Union Leader (11/22/2015) 

Q: My mother recently passed away. When we went to distribute her assets in accordance with her Will, we found that her largest asset was a bank account, which she owned jointly with my sister. It is not part of her probate estate and instead my sister gets it all.  My two brothers and I are out in the cold, inheriting only minimal assets, despite the fact Mom’s Will said everything should be split evenly.  What happened, and how can I be sure that my wishes are carried out when I die? 

A: I am sorry for your loss.  Sadly, your story is all too common.  Many of us own property jointly with someone else, not realizing that in many cases, such co-ownership will override our estate planning documents such as wills and trusts. 

If property is owned as “tenants in common” (which is the most common form of joint ownership), then a co-owner’s share of the property will pass according to his/her Will (or other testamentary document such as a trust), or will be considered part of the decedent’s intestate estate.  Unfortunately, your mother most likely owned her bank account as a “Payable on Death” account (POD) or opened it with your sister as a co-owner with rights of survivorship (ROS).  With either designation, when a co-owner dies, the survivor inherits.  The same is true if someone owns property as joint tenants or as tenants by the entirety:  in both cases, the survivor inherits automatically, superseding any provision in a will.

While this can be an effective method of transferring property after death, so often (as in your family’s case), unintended consequences occur.  Other disadvantages to owning property jointly include:

  1. Loss of control.  Let’s say two people jointly own a piece of real estate.  A joint owner will have the right to sell his or her interest to anyone, without the consent of the co-owner.  Also, the property may be subject to the claims of the co-owner’s creditors.  Transferring the property into a trust with a spendthrift clause will protect the property from creditor’s claims.
  1. Higher income taxes.  Property transferred at death gets a “stepped-up basis,” which means heirs can sell it without capital gains tax implications.  This is a benefit most often with real estate and investments (e.g., stock ownership).  However, a joint owner’s share of the property does not get the stepped-up basis.  This means any appreciation in the value of the asset between the time the joint owner is added and the date of death will be subject to capital gains tax.
  1. Higher gift and estate taxes.  Adding someone’s name to the title of an asset (such as a house) is considered a taxable gift. If the value of the gift exceeds $14,000 (in 2015), a federal gift tax return should be filed.  As above, the property transferred will not be eligible for a stepped-up basis at death.  The property retained by the original owner remains in the original owner’s estate.  For those with assets in excess of $5,430,000 (in 2015), this can become an estate tax issue as well.

So, while co-ownership of property is common, it pays to pay attention to the details.  Understanding that certain forms of joint ownership will prevail over the terms of a will or trust will help insure that you properly title assets or place them in a trust.  No one needs additional family strife, particularly after the death of a loved one, when it could easily be avoided.

Linda Garey can be reached at [email protected].

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association.   We invite your questions of business law.  Questions and ideas for future columns should be addressed to:  McLane Middleton, 900 Elm Street, Manchester, NH 03101 or emailed to [email protected].  Know the Law provides general legal information, not legal advice.  We recommend that you consult a lawyer for guidance specific to your particular situation.

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