Many people choose to set up joint ownership for bank accounts or real estate, especially with rights of survivorship, as a way to avoid probate. It seems like a simple, convenient way to ensure that the surviving joint owner (usually a spouse or family member) automatically inherits the property without the need for court involvement. However, while joint ownership may seem appealing for estate planning, it can lead to serious unintended consequences. Before adding someone as a joint owner, consider these potential pitfalls.

1. Joint Owner's Debts Could Become Your Problem

One of the biggest risks of joint ownership is that the other owner's financial liabilities may affect you. If the joint owner has debts, files for bankruptcy, or is subject to a tax lien or judgment, creditors may pursue the jointly owned property. For example, if you add your adult child to the deed of your home and they have undisclosed debts, your property could be at risk of being seized to settle those debts. Even though your share of the property won't be taken, the property could still be sold to satisfy your co-owner's creditors, potentially forcing you out of your home.

2. Unintended Heirs Could Inherit Your Property

Joint ownership can create complications, especially in blended families. For example, if you own property with your spouse and you pass away, your spouse automatically inherits the property. But what happens if your spouse remarries? Your property could end up being passed on to their new spouse or stepchildren, rather than your own children, creating an inheritance scenario you likely did not intend.

3. Accidental Disinheritance of Family Members

When property is owned jointly, the surviving joint owner gains full control upon your death, regardless of what your will says. If you plan to divide property (such as a family business or home) among multiple heirs, joint ownership can override those intentions. For example, if you co-own a business with one child but want to distribute ownership equally among all your children in your will, joint ownership could leave your other children with nothing.

4. Selling or Refinancing May Become a Nightmare

Joint ownership requires the consent of all owners for major decisions, such as selling or refinancing a property. If the other joint owner disagrees, you could be left unable to sell. Worse, if the co-owner becomes incapacitated and lacks a durable power of attorney, you may need to go through a lengthy court process to have a guardian appointed to represent their interests. Even with a guardian, you could face obstacles if their fiduciary responsibility leads them to oppose your decisions.

5. Triggering Unnecessary Capital Gains Taxes

Joint ownership can have costly tax implications. If you add an adult child as a joint owner of your home and then sell the property, both of you may be responsible for capital gains taxes based on the property's appreciation. In contrast, if your child inherits the property after your death, they would only owe capital gains taxes on any increase in value from the date they inherited it, potentially saving them a significant amount in taxes.

6. Potential Gift Tax Liabilities for Unmarried Partners

Adding an unmarried partner as a joint owner of your property may trigger gift taxes. The IRS views the transfer of ownership as a taxable gift, potentially leading to unnecessary paperwork and tax liabilities depending on the property's value.

Avoid the Risks of Joint Ownership with Proper Estate Planning

While joint property ownership may seem like an easy solution, the risks and complications often outweigh the benefits. A carefully structured estate plan can help you avoid these issues while ensuring that your assets are distributed according to your wishes. By consulting with an experienced estate planning attorney, you can protect your loved ones from potential legal and financial problems while minimizing taxes and probate delays.

Our team of estate planning professionals is here to help. We specialize in creating customized plans that address your unique needs, whether you're concerned about taxes, family dynamics, or protecting your assets. Contact us today for a consultation, and let us help you achieve peace of mind knowing your estate is in good hands.