While joint ownership of real estate is a popular method for avoiding probate in the event of an owner’s death, this arrangement also has its drawbacks. Generally, real estate may be seized or at least considered as an asset for all owners, including joint owners who were added to a title for the very purpose of avoiding or delaying probate court. In other words, each joint owner adds to the legal exposure of a given piece of real estate.
This article discusses the risks involved in joint ownership and how a living trust may be a better option.
An Example of How Joint Ownership Can Backfire
A doctor and her husband are building their dream home in the suburbs of Atlanta. The loan application is submitted and the closing attorney is instructed to prepare the transfer documents. Both the mortgage and the deed are prepared in their joint names.
This is actually quite a common scenario. However, the couple has exposed their most valuable asset to the liabilities of both partners, including the high lawsuit risks of the doctor. Without proper planning and forethought, this family may be headed towards a forced sale of the home to satisfy a judgment. Not only does the doctor in trouble lose her home, but so does her family.
Ownership in the property may be just the incentive that a creditor or a potential plaintiff needs to pursue a lawsuit. If the joint owner otherwise has no substantial assets, it could be an unexpected windfall and guarantee that a lawsuit will be filed.
But Doesn’t Joint Ownership Avoid Probate?
It may avoid probate upon the death of the first owner and if the property is owned as joint tenants with a right of survivorship. But when the second owner dies, the property would still need to be probated. If the property is owned as tenants in common, then probate would not be avoided even upon the first death.
What Other Problems Can Joint Ownership Present?
In addition to the fact that joint ownership only delays probate until the second owner’s death, the arrangement may also present the following issues:
If you are the first to die, you will have lost control over the asset (neither your will nor trust controls what happens to the property).
A remarriage may result in your children being disinherited, not willfully, but due to poor planning.
Adult children may lose jointly owned property to debts or divorce (your hard earned property could end up in the hands of an ex- son or daughter-in-law with a good divorce attorney).
Your co-owner could transfer their shares to someone else without your knowledge or approval.
If one of the owners is in a high-risk profession, like a medical doctor, then all the property is subject to the high risk, even the portion owned by the non-doctor owner.
There are gift tax and estate tax consequences that could be extremely detrimental, especially if your estate is larger.
It is very difficult to remove a co-owner from an asset’s title without their complete cooperation.
Adding a child or a non-spouse to the title of property purchased by you could trigger a gift tax liability.
How a Living Trust May Help
A living trust is a revocable trust that is set up during your life. Most of your assets are then titled in the name of the living trust. You maintain complete control of the trust during your life and can add or remove assets. Upon your death, the assets in the trust are distributed by your named trustee (usually your spouse) to your named beneficiaries, without probate.
A living trust maintains your family’s financial privacy, provides an easier and more efficient administration of your estate, and can protect dependents with special needs. A living trust is easy to set up and maintain and can be changed or canceled at any time.
A living trust is usually drafted to include the following additional benefits:
A credit by-pass trust that allows both you and your spouse to use your federal estate tax exemption.
Delay of estate taxes until the surviving spouse dies.
Gives the first spouse to die control over who will eventually receive the assets in their trust.
Prevents court control of assets at physical or mental incapacity.
An asset protection trust that keeps assets in a trust until the beneficiaries reach the age at which you want them to inherit.