People often own property with someone else: a spouse, relative, or friend. Co-ownership generally takes the legal form known as “joint tenancy”. It means that when one of you dies, the other joint tenant immediately owns all of the property.
While it may seem like a good idea, holding property as a joint tenant often creates problems. Here are eight reasons why.
1. Lack of control. Giving someone co-ownership means that you give him or her equal control. Adding someone to the deed of your home gives that person equal control. It prevents you from selling or getting a mortgage unless the other owner agrees. Sometimes it may trigger a due on sale clause in an existing mortgage. Later if you sell the house, the co-owner may be entitled to half of the proceeds. Adding another person to a bank account or stock account gives them equal access to the account and freedom to withdraw, to trade stocks or to veto your transactions.
2. Exposure to creditors. If your co-owner’s creditors come after jointly owned property, they may be able to get part of the house or account. If your co-owner files for bankruptcy or is found liable for a judgment, you can find your assets under seizure by a bankruptcy trustee or a creditor.
3. Trust. If you can’t be sure of your co-owner, you could find that your bank account has been emptied and have no legal recourse.
4. Problems after death. An adult child often becomes a joint owner on an elderly parent’s bank account to help with bill paying. But when the parent dies, who owns the account: the child or the parent’s estate? The question of whether or not the joint account was a convenience or a gift often leads to nasty lawsuits.
5. Tax issues. Married couples in community property states like California enjoy a tax advantage from holding property as community property instead of joint tenants. When the first spouse dies, the survivor enjoys a full “step up” in basis. Basis is the value of the property for capital gains tax calculations. Holding the property as joint tenants can lead to a higher tax bill.
6. Tax planning. Careful planning to reduce estate taxes can be frustrated if property is passed outright to a beneficiary through joint tenancy.
7. Property tax reassessment. County tax assessors scrutinize every opportunity to reassess taxes on real property. If property is conveyed through a joint tenancy without timely filing the proper reassessment exclusion forms, the result may be higher property taxes.
8. Shaky marriage. If you transfer separate property to your spouse in both your names, you can inadvertently change the character of the property to community property. If the marriage doesn’t last, problems can arise.
The information contained here is intended to be educational only: it is not legal advice nor does it create an attorney client relationship between the viewer and this firm. Legal issues are frequently complex and individual. For legal advice specific to your issue, please speak to one of our attorneys.