Over the years since I prepared my first client estate plan in January of 1985, time and time again, the most common estate planning pitfall I have seen is joint ownership gone awry.
Estate planning can be daunting. Once you get past the fact that your very mortality (and morbidity) is the triggering event, estate planning then means taking stock of all you own and, what is often more important, how you own it. Yes, there are many forms of ownership and each can make for some difficult wrinkles.
One common phenomenon is joint ownership between generations. Not only is it common, but it can make for some unintended (and unpleasant) consequences. Forbes recently ran a piece on some of these problems and the top five reasons to avoid joint ownership of assets. Let's review some of the high points, but I would commend the full article to your reading file.
Joint ownership oftentimes is an attempt to simplify things, or at least that is why people use it as a means of holding title. Perhaps they want to simplify practical day-to-day financial management. For instance, aging parents needing such help may add an adult child’s name to a bank account or investment, either for direct aid or merely for assisting with the management of their accounts or assets. Likewise, it could be done as an attempt to avoid probate. Adding the adult child’s name to the account, investment, or real estate is a form of will-substitute (a so-called "poor man's will"). Of course, these are only simple, self-help solutions, and they actually may work, when things go off without a hitch.
One problem to remember is joint ownership is a two-way street. That means an adult child joint owner has equal ownership rights to the assets and, therefore, so do any of that adult child’s financial predators. And predators themselves come in a variety of forms, as when the adult child has their own creditors, marital strife, or even a lawsuit in civil court. In addition, while no parent would anticipate it, the adult child may use the jointly owned bank account for a "quick loan" when they are running a little short of cash. Any of these unintended consequences not only can jeopardize the financial independence of an aging parent, but also can cause hard feeling among other adult children who may (or may not) be joint owners with their common parent.
Another problem, especially from an estate planning perspective, is that joint ownership as a stop-gap or a will-substitute is not really estate planning and may run afoul of the parent's actual estate distribution wishes. For example, the adult child who has joint ownership doesn't have to share such assets upon the parent's death. As you can imagine, it is very easy for such cases to spill over into family squabbles and even into prolonged litigation.
Sometimes joint ownership seems like a good idea and a quick fix to avoid probate. And, sometimes it is. Before you use joint ownership as a form of titling your assets, however, consider the drawbacks.
In the end, an estate planning attorney can help you determine whether joint ownership is appropriate under your unique circumstances. Remember: Look before you leap. The protection of your assets and family relationships are at stake.
Reference: Forbes (September 13, 2011) "Top 5 Reasons to Beware of Joint Ownership Between Generations"