It is common to see an asset transferred into joint name solely for the convenience of the original owner. The unintended consequences of joint ownership, however, can lead to unpleasant surprises.
The fact pattern is familiar: an aging relative may ask you to be a co-owner of her bank account so that you can help write her checks or can access her money if she becomes disabled. Or, a parent may transfer his or her residence into joint name with a child so that ownership will pass to the child upon the parent’s death without having to go through probate.
The pitfalls, however, are as unfamiliar as they are perilous.
First, a transfer into joint name may unintentionally result in a completed gift to the co-owner. For federal gift and estate tax purposes, adding a child’s name as a joint owner of a house results in a taxable gift of one-half of the current fair market value of the house. The original owner may be required to file a gift tax return and, in extreme cases, pay gift tax.
Second, adding a co-owner exposes the asset to the co-owner’s creditors. If the child who co-owns your house is forced into bankruptcy or loses a hefty lawsuit, the child’s creditors can take the child’s half of your house.
Third, if a child co-owns your bank account and later becomes disabled, the child’s attorney-in-fact or guardian steps into the child’s shoes. The bank will not be able to prevent the attorney-in-fact or guardian from drawing your account down to $0.
Fourth, joint ownership may unintentionally interfere with your estate plan. You may have wanted nothing more than assistance from the child who lives closest to you, but if you add your child to your bank account as a joint owner with right of survivorship, you have also just given the entire account to that child, effective upon your death. The account will not be divided equally among your children upon your death, even if your will specifically calls for that result.
So before casually adding a child’s name to one of your assets, make sure you understand the options and know what you are getting yourself into.