I frequently run into new clients who have titled bank accounts, stocks, brokerage accounts, certificates of deposit (CDs), and even real estate, jointly with their adult children as an estate planning technique. They reason that if something happens to them, that asset will automatically go to their children. I almost always counsel against this as there are numerous pitfalls in doing so.
Jointly titling an asset or account is NOT a substitute for a Trust and Will and should never be treated that way. Only a Trust or Will can adequately ensure that a person’s assets will pass to their intended beneficiaries. This is something that should be discussed in detail with an experienced estate planning attorney. In addition to drafting the necessary estate planning documents for you, our office will provide you with detailed instructions on the titling of your accounts and assets and even the structuring of beneficiaries.
Establishing a joint account with your adult children or other relatives is filled with risks, pitfalls and drawbacks, that should usually be avoided. Such problems include the following:
- Choosing the wrong type of joint ownership.
Assets can be titled jointly “with rights of survivorship” or jointly as “tenants-in-common.” They are both still referred to as jointly owned, but they are vastly different. Titling an account as “joint tenants with rights of survivorship” means that if one person passes away, the other becomes the sole owner. Titling an account as “joint tenants-in-common” means that you each own an undivided interest in that account, and if one co-owner passes away, the other does not automatically become the owner of the account. If the account is held as tenants-incommon, the deceased owner’s share will have to pass through Probate Court pursuant to their Will. New clients are often not aware of these differences and improperly set up their joint account.
- If the co-owner of the account dies before you or at the same time as you, the account may end up in Probate Court.
If both co-owners of the account pass away, the account may go through Probate Court.
- The co-owner of the account becomes the sole owner of the account and does not have to share that account upon the client’s passing.
I often have people tell me that they have several children, but have only listed one of the children listed as a co-owner of the account because they “trust” that child to distribute the proceeds to the others. WRONG. Any attorney will tell that surviving child that the money is 100% theirs and that they have absolutely no obligation to share that money with any of his or her siblings. If a parent only puts one child’s name on the account, the law interprets that as the parent’s intention to give that account to just that one child. In fact, if they do share that money with their siblings, there could even be adverse gift tax consequences in doing so.
- The jointly owned account is subject to the creditors of both co-owners.
If a client puts their adult child on their account and that child is ever sued by creditors, that entire account is subject to seizure for that debt. If the child gets a judgment against them due to an automobile accident, again, that entire account can be seized to satisfy that judgment.
- Loss of the asset in the event of a joint owner’s bankruptcy.
Likewise, since the adult child is considered a co-owner of the asset, if that child files bankruptcy, the account may be lost to the Bankruptcy Court and the creditors.
- A joint owner can withdraw that entire account and use it for themselves if they choose.
A joint account owner can “go rouge” and withdraw the entire account without the other owner’s permission. I’ve seen this happen in unfortunate situations where an adult child has become involved with substance abuse, addiction issues or criminal elements.
- Problems in selling the asset.
If the client later decides to sell or dispose of the jointly titled property, the written consent of all of the other owners (and even their spouses in the event of real estate) may be required.
- There’s no obligation of the joint tenant to use that account to care for the parent if they become incapacitated.
I often hear that a potential client puts his or her adult children on their account so that they can use that account to care for them and pay their bills if they become incapacitated. Unfortunately, there is absolutely no obligation for that child to do so. They can decide that they’re going to use that money only for themselves.
- Loss of the asset if a co-owner gets divorced.
Remember, from the minute the coowner is put on the account or asset as a joint owner, they are a full-fledged owner of that asset. So, if an adult child is put on that account, and that child gets divorced, that account may be viewed as owned by that child, thus giving their spouse claim to that account in a divorce.
- Possible gift tax liability.
Adding a child’s name to your account may be construed as a gift to that child, thus triggering the necessity of filing a gift tax return at the end of the year and possibility having adverse gift tax consequences.
Joint ownership is not a substitute for proper Estate Planning. Our office has seen disasters occur because of such jointly owned accounts. This is a topic that should be discussed in detail with an experienced Estate Planning Attorney. There is no substitute for such professional advice.
Estate planning attorney Christopher P. Cox has more than 30 years of experience and has helped countless numbers of people with all aspects of estate planning, probate and trust administration. A free consultation is available and provides a great opportunity to learn how the law applies to your specific situation.