Assets in Joint Ownership: Could This Be A Problem?
It isn’t uncommon for people to set up their bank accounts, properties or various other assets in a manner where they have joint ownership with someone – either a spouse or other family member, and even a friend or business partner in some cases. While many people think that this is a good, cost-free replacement to a will and probate procedures, the truth is much more complicated and a lot of problems can arise in the future.
What is joint ownership of assets?
Joint ownership of assets is a legally binding contract where two or more people own an undivided interest in one or more assets. When either of the owners dies, the ownership of assets passes on to the surviving owner automatically.What benefits does joint ownership of assets bring?
First, it is very easy to establish joint ownership of assets. All you need to do is visit the bank and sign some paperwork with your intended joint owner. Once this process is completed and the joint owner is added, he or she becomes a legal owner of the respective assets in question and is granted total control and access to them. Another primary benefit of joint ownership that most people seem to concentrate on is that when one owner dies, the joint owner typically receives ownership of the assets via survivorship right. Moreover, if one of the joint owners becomes incapacitated, the other can manage the account and assets on their behalf.What are the problems with joint ownership of assets?
Most Americans don’t realize that although joint ownership of assets does offer a few benefits as mentioned above, there are numerous problems that far outweigh the benefits. Here are the problems that you or your loved ones might end up facing when it comes to joint ownership of assets:1. Probate is only avoided temporarily
The primary appeal that draws people towards joint ownership of assets is that when one owner is deceased, the other automatically inherits the assets without having to go through the rigorous and complicated process of probate. However, this is basically untrue. While joint ownership does avoid probate at the death of one owner, the assets do need to pass through the often costly and time-consuming probate process upon the death of the surviving owner. Bear this fact in mind if your only focus of joint ownership is avoiding probate.2. Loss of control over assets
With joint ownership, the first owner to die loses control over the assets. This means that they have no say in how their assets will be managed. In all effectiveness, this means that you might end up losing total control over how the fruits of your life’s work are distributed after your death. This loss of control over assets can especially affect your children if your spouse decides to remarry and become a joint owner with their new partner. In such a scenario, whoever your spouse marries will become the ultimate beneficiary of your entire estate while your own children will be effectively disinherited.
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3. Exposure to debts and other risks
With joint ownership of assets, any debt or other financial obligations of the other owner, could be transferred to you. If your joint owner becomes bankrupt, has a tax lien or some serious court judgment against them, you could end up with your existing joint owner’s creditors as your future joint owners. Let’s elaborate this with an example: if your joint owner has a debt that you don’t know about, the court could order your property to be seized to collect the said debt. Just imagine not having a clue about anything only to end up losing your house suddenly one day. This is just one reason why you should always think twice before opting for joint ownership of assets.4. Difficulties in selling or refinancing the house
All joint owners of a property are required to sign off on a property sale deed. Now, if your joint owner disagrees with you when it comes to selling your house, things can come to a standstill. The only option that would remain with you would be to take your joint owner to court in order to force a sale. Moreover, if your joint owner becomes incapacitated somehow, you may need to petition a court to appoint a guardian to represent your incapacitated joint owner’s interest in the sale of your house. Unlike your joint owner, this appointed guardian might not see eye to eye with you, leading to further complications.5. Gift tax issues
When the joint owner of your assets is not your spouse, the government deems all shared assets as gifts. Usually, gift taxes need to be paid by the donor, which will be considered by the government as the first owner. For instance, if you decide to add your son as a joint owner of your personal home, the government will consider that you have gifted your son a gift equal to half of your home’s value, and you will need to pay gift taxes accordingly.6. Capital gains tax issues
For couples living in one of the nine community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, joint ownership of assets can result in a heftier capital gains tax. In most states, when you are deceased, your heir pays capital gains tax based on the current market value of the property, as opposed to the price you had originally been purchased for. So, if the property you had originally purchased for $125,000 is worth $175,000 when you die, the government will consider $175,000 as your heir’s ‘cost basis’. If your heir sells it for this price, the government will not levy any capital gains tax. However, in the community property states mentioned above, joint ownership can lead to some very undesirable results. The government in these states allow your spouse only half ‘step-up in basis’ of the property, according to its current market value. This effectively means that when your spouse sells the asset, more of the profit generated through the sale will be subject to the costly capital gains tax.To sum it up
You can clearly see that joint ownership of assets is not as easy and cost-effective in the long run as most people think it to be. Fortunately, there are many safer alternatives that give you more control over how your assets will eventually be distributed. Get in touch with some top financial advisors today to know more about managing your assets effectively.
