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The 3 Pitfalls of Joint Ownership for Estate Planning

By Harry S. Margolis

joint-ownership-estate-planning-Wellesley-MAJoint ownership of bank accounts, investments and real estate can have both significant benefits and risks. To understand these, we must first explore the three types of co-ownership: co-tenancy, joint ownership and tenancy by the entirety. All three types of ownership can apply to real estate, but more rarely to other types of investments where joint ownership predominates.

  • Co-tenants. Co-tenants of real estate (or in some cases bank or investment accounts) generally have equal access and usually equal ownership, though not always. It’s possible for co-tenants to have unequal shares. For instance one co-tenant can own a quarter of a parcel of real estate and the other three quarters. When the property is sold, each will receive her share based on her ownership interest. The most important feature of a co-tenancy, however, is what happens when an owner passes away. When that happens, his interest passes to his estate and ultimately, to his heirs.
  • Joint tenants. Joint ownership often carries with it the words “with right of survivorship.” While these additional words are not really necessary, they highlight the distinguishing feature of joint tenancies—that when one owner dies, her interest passes to the other joint owner (or owners), rather than to the deceased owner’s estate. Joint tenants also always have an equal ownership interest in the property, so if there are two owners, they each have a one-half interest, and if there are three owners, they each have a one-third interest.
  • Tenancy by the entirety. This is a form of joint ownership reserved for married couples. As with joint tenancies, if one spouse dies, the property passes automatically to the surviving spouse. The main difference is that it provides creditor protection. One spouse may not sell, give away or pledge the property as security for a loan without the other spouse signing off, and it cannot be subject to claim for the debts of just one spouse. For these reasons, most real estate owned by two spouses is owned in the form of a tenancy by the entirety.

While this introduction has focused on three types of ownership that usually relate to real estate, what follows focuses on joint ownership of investments and bank accounts.

Many people, especially seniors, see joint ownership as a cheap and easy way to avoid probate since joint property passes automatically to the joint owner at death. Joint ownership can also be an easy way to plan for incapacity since the joint owner of accounts can pay bills and manage investments if the primary owner falls ill or suffers from dementia. These are all true benefits of joint ownership, but three potential drawbacks exist as well:

  1. Risk. Joint owners of accounts have complete access and the ability to use the funds for their own purposes. We’ve seen children who are caring for their parents take money in payment without first making sure the amount is accepted by all the children. In addition, the funds are available to the creditors of all joint owners and could be considered as belonging to all joint owners should they apply for public benefits or  financial aid.
  2. Inequity. If a senior has one or more children on certain accounts, but not all children, at her death some children may end up inheriting more than the others. While the senior may expect that all of the children will share equally, and often they do in such circumstances, there’s no guarantee. We’ve seen clients with several children maintaining accounts with each who are constantly working to make sure they are all at the same level, a system that involves constant attention with no guarantee of it working, especially if funds need to be drawn down to pay for care.
  3. The Unexpected. A system based on joint accounts can really fall through if a child passes away before the parent. Then it may be necessary to seek conservatorship to manage the funds, or they may ultimately pass to the surviving children with nothing or only a small portion going to the deceased child’s family. We had a client who put her house in joint names with her son to avoid probate and MassHealth’s estate recovery claim. When he died unexpectedly, the daughter-in-law was left high and dry, despite having devoted the prior six years to caring for her husband’s mother.

We find that joint accounts work well in two situations. First, when a senior has just one child and wants everything to go to him, joint accounts can be a simple way to provide for succession and asset management. It has some of the risks described above, but for many clients they are outweighed by the convenience of joint accounts.

Second, it can be useful to put one or more children on one’s checking account to pay customary bills and to have access to funds in the event of incapacity or death. Since these working accounts usually do not consist of the bulk of a client’s estate, the risks listed above are relatively minor.

For the rest of a senior’s assets, wills, trusts and durable powers of attorney are much better planning tools. They do not put the senior’s assets at risk. They provide that the estate will be distributed as the senior wishes without constantly rejiggering account values. And they provide for asset management in the event of the senior’s incapacity.

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