The Perils of Owning Assets Jointly
Joint ownership arises where two or more people own an undivided interest in an asset or property. When one of the owners dies, the entire ownership passes automatically to the surviving joint owner without going through probate. Because the use of joint property can avoid probate, people sometimes use it as an estate planning method. Unfortunately, this often does more harm than good.
With real estate, for instance, people often use “quit claim” deeds to attempt to create a type of ownership called “joint tenants with rights of survivorship.” Unfortunately, they often do so improperly, sometimes with assistance of an attorney. This is due primarily to the fact that there are four basic ways to own property jointly in Michigan and choosing the wrong one can result in the property still going through probate and sometimes not even passing to the people intended.
Joint Ownership results in loss of asset control. Real estate, for instance, cannot be sold without the permission of all joint owners, and sometimes the spouses of the joint owners. For example, when a married man (e.g. - a son) is added to the title of certain real property in Michigan their spouse automatically acquires a “dower” (a life estate) interest in the property that will also require the spouse’s permission to transfer the property.
Problems can arise even when you have total confidence in a joint owner. For instance, if a joint owner becomes incapacitated, real property cannot be transferred without going to court and having a judge appoint a conservator to act on the joint owner’s behalf. The court will have ultimate control over the property until the incapacity ceases or the joint owner dies.
Another problem area is the use of joint bank accounts. Funds from jointly owned bank accounts can be withdrawn by a joint owner, without permission of the other joint owners. There is no recourse against the bank, which is protect by law, if the joint owner absconds with the money.
Jointly owned assets are also subject to attachment and confiscation by the creditors of any or all of the joint owners, such as in the case of a divorce, a failed business debt, or a liability claim against a joint owner.
Making someone a joint owner of your property (e.g. - real property or stocks) can create needless gift and capital gains taxes. For example, people often create joint ownership of real estate by using quit claim deeds. The problem is that the IRS may consider the creation of the joint tenancy as a gift to the newly added owners. When the asset is sold, the surviving joint tenants may have to pay capital gains taxes (15%). These capital gains taxes often far exceed any costs that would have been incurred by the asset going through probate.
Using joint ownership can also disqualify a joint owner from receiving Medicaid and Supplemental Security Income benefits. For instance, just adding someone as a joint owner on your real property is treated as a gift and can create a disqualification period, called a “divestment penalty.” See our article “The New Medicaid Gift Rules” for further discussion of these rules and the problems such transfers can cause.
With these perils in mind, remember that joint ownership of an asset (with rights of survivorship) only results in a temporary avoidance of the Probate Court. When the last joint owner dies the asset will pass through the Probate Court.
The good news is that all of the problems associated with joint ownership and the probate court process can be avoided with proper estate planning, such as with the use of a Living Trust, powers of attorney, and other estate planning methods.