It is quite common for a parent to add a child’s name to his or her checking account or savings account, or to any other asset, thus making the child a joint owner. While this is usually done for convenience purposes, it can have serious, unexpected and undesirable consequences. Since the child legally owns the asset, creditors of the child can levy against it, thereby placing the asset at risk. Perhaps more disconcerting is the fact that if the child becomes involved in a divorce action, the child’s spouse may attack the ownership interest in the asset as marital property. At a minimum, the child will be required to disclose the existence of the account.
By making a child a joint owner of your accounts, you are empowering the child, during your lifetime, to withdraw monies from these accounts. At your death, the child will automatically become the sole owner of these joint accounts, thus effectively disinheriting other children. While the full value of the joint asset will be part of your taxable estate, it will not pass under the terms of your will. Therefore, if your desire is to have all of your assets distributed to your children equitably and to have the tax burden shared equally, making a child a joint owner is ill-advised. Making all of your children joint owners will only serve to increase the chances that your assets will be at risk because of divorce, bankruptcy or other creditor issues.
The majority of married couples own all or most of their assets jointly, with rights of survivorship. Owning assets in this manner is quite convenient because it gives both the husband and wife easy access to accounts. If all assets are owned jointly, probate can be avoided. Unfortunately, however, if the combined value of the couple’s estate (including life insurance, real property, investments, etc.) exceeds $1 million, owning assets jointly can result in adverse tax consequences upon the death of the survivor. The preferred method of handling such a situation is to create a “credit shelter trust” under the terms of the couples’ wills, so that an estate tax problem can be minimized or avoided entirely. A couple must then either separate their assets or change the ownership of assets to “tenants in common”. While effecting such a change will result in the need to probate the will of the first to die, probate is usually a rather easy and inexpensive process and significant tax benefits can be obtained by doing so.
If one’s only goal is to avoid probate, there are ways to do so without incurring the risks associated with joint ownership. Establishing a revocable living trust may be a better option. Of course, you should first obtain the advice of an attorney experienced in estate planning.
IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.