Often, an older family member will transfer a bank account, brokerage account, real estate or other property into a “joint” account with a child or other younger relative in order to allow management of that asset by the younger relative and to avoid a probate on the death of the older family member. It is true that property titled in joint tenancy will avoid a probate. It is also very common for an aging person to ask a son or daughter to assist in paying bills and otherwise managing their finances. However, there are many legal and tax consequences to a transfer to a joint account; and there are often better alternatives.
1. POSSIBLE GIFT TAX UPON TRANSFER.
Most people do not realize that when you place property (which was originally owned solely by one person) into the names of that person and another person “as joint tenants”, a gift has been made. For example, if Mother transfers a home with equity of $200,000 into the names of “Mother and Daughter, as joint tenants”, Mother has made a gift of $100,000 to Daughter, and may owe gift tax upon that transfer.
2. CREDITORS’ CLAIMS
Each joint tenant (i.e., each owner) has a pro-rata actual ownership interest in the asset. The creditors of each owner may attempt to reach and foreclose upon the pro-rata ownership interest of the debtor/owner. If the other owner files a bankruptcy, the property may not be sold, leased, refinanced or otherwise transferred without a court order. Possible creditors would include someone injured in an accident caused by one of the joint tenants, a lender or a former spouse. The other joint tenant may find himself or herself in the middle of a legal dispute between the co-owner and the creditor.
As a joint tenant owner, each person has control over the asset. All of the other joint tenants must consent, and sign all documents, before that asset can be sold, refinanced, or given away. If you and the joint tenant see things differently, you may have trouble with the asset. Things may become particularly troublesome if a divorce is involved, and the joint tenant’s spouse attempts to tie up the property.
4. TERMINATING THE JOINT TENANCY
Under the law, joint tenancy property may not be “willed” away; rather, the surviving joint tenancy will by operation of law automatically receive the interest of the other person without a probate. However, an owner of joint tenancy property may sever the joint tenancy property. Upon such a severance of the joint tenancy, the asset will then be owned by each person as co-owners, and each owner may then give away his or her share during life or at death – in other words, the “right of survivorship” is terminated.
5. ALTERNATIVES TO THE JOINT ACCOUNT
A power of attorney will allow a loved one to deal with an aging person’s assets. The power of attorney may be “general” (the agent can take any act regarding any property) or may be “special” (the agent may only act regarding one or more specified assets). A power of attorney may be effective immediately, or may “spring” into effect only upon the older person’s incapacity. By establishing what is commonly known as a “living trust”, the older person may appoint a “successor trustee” to take over and manage the assets when he or she no longer desires to do so.
Disclaimer: Blog posts are for general information only and may not be applicable to your individual circumstances. This blog post is not intended nor shall it be deemed to provide legal advice to its reader. If you would like further information on the subject of this blog post, please feel free to contact me.
©Bill Van Dusen 02/10/2017