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:
- 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.
- 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.
- 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.