Beware the joint tenancy trap
As parents age, families sometimes struggle with how to best keep their parents’ financial affairs in order. One common approach is for aging parents to put one or more of their children on their investment accounts, bank accounts and real property. When I ask the parents why they would ever do such a thing, I often hear something like, “It’s so much easier. After all, my kids are going to inherit whatever is left anyway. Why not put them on the accounts right now so they can help me?”
As compelling as that logic may appear, putting someone else on your account—even a trusted child—can create serious problems for you, your estate and your heirs. I am not an attorney, and this is not intended as legal advice, but there are a few things you should carefully consider before you go down that path.
When you put another person on your account or on the title to your real property, you grant that person a legal ownership interest in your property equal to your interest. In legal parlance, this type of ownership is called joint tenancy. If I were to make my son a joint tenant on my account, he could withdraw all the assets from that account and dispose of them in any way he chooses without my prior knowledge or consent. Granting someone, anyone, that kind of power over your assets is a grave decision.
Making your child a joint owner of your assets also exposes those assets to claims by your child’s creditors. Suppose your child faces a financial reversal and files for bankruptcy. To retain your property, you may be forced to buy back one-half of it at current fair market value. Or let’s suppose your child has an accident. If a judgment is recorded against your child, you may have to buy back one-half of your joint tenant property at its current market value to help settle those claims.
Other complications can arise when one of the joint tenants dies. Joint tenancy provides for the right of survivorship. When a joint tenant dies, the property transfers directly to the surviving joint tenants without going through probate and without reference to any will. Of course, this simplifies things from a probate perspective, but it can really complicate relationships among heirs. Suppose I put my oldest daughter on my brokerage account. When I die that account will transfer directly to her as joint tenant. Even if my will says my assets are to be split evenly between all five of my children, her claim as joint tenant on the brokerage account is senior to the rest of my children. As joint tenant, my daughter will get the assets in the brokerage account and she and her four siblings will split evenly the rest of my assets.
Holding property as joint tenants may also increase your heir’s tax exposure. When you make someone a joint owner on an account, you give them an equal ownership interest in those assets at your original cost basis. When one of the owners dies, the remaining owners get a step up in basis on the proportion of the assets the deceased person owned at death. Let’s suppose my son and I are joint tenants on an account. When I die, my son will get a step up in basis on one-half of the assets—the half that I owned. His half of the assets retains its original basis. On the other hand, if that account were only in my name or in the name of my living trust, my heirs would get the full step-up in basis upon my death.
Given the complexities created by joint tenancy, aging parents should think very carefully before putting a child’s name on their accounts or real property. It is well worth the time and expense to have an experienced financial advisor or attorney guide you through this process.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.