There are specific estate planning strategies that, on the surface, may sound appealing. This includes owning property jointly with a child or other family member. However, these techniques can result in unwelcome outcomes that outweigh potential benefits.
To be clear, owning an asset with your child as “joint tenants with right of survivorship” offers advantages. Assets may include real estate, a bank or brokerage account, or a car. When you die, the asset automatically passes to your child without needing more sophisticated estate planning tools or going through probate.
However, owning property jointly with a child or other family member can result in unexpected outcomes. These include:
Transfer tax exposure. Adding your child to your property title may be considered a taxable gift of half the property’s value. And when you die, half of the property’s value will be included in your taxable estate.
Increase in capital gains tax. As a joint owner, your child loses the benefit of the stepped-up basis enjoyed by assets transferred at death, exposing him or her to higher capital gains tax.
Exposure to creditor claims. When your child becomes a joint owner, the property is exposed to claims from the child’s creditors.
Loss of control over the assets. Adding your child as an owner of certain assets, such as bank or brokerage accounts, enables him or her to dispose of them without your consent or knowledge. And joint ownership of real property prevents you from selling or borrowing against it without your co-owner’s written authorization.
Unintended consequences. If your child predeceases you, the assets will revert to your name alone, requiring you to devise another plan for their disposition.
Unnecessary risk. When you die, your child receives the property immediately, regardless of whether he or she has the financial maturity and ability to manage it.
The good news is that many of these outcomes can be mitigated or avoided with the help of your estate planning advisor. Using certain trusts may be the answer.
