Disadvantages of Owning Property Jointly with Survivorship
Property that is owned jointly with survivorship does avoid court probate at the death of the first joint owner. At the first death, this property passes directly to the survivor and does not even go through the will. Upon the death of the last joint owner, however, there will be a probate. If both joint owners die in a common accident, two probates are required. Owning property jointly with survivorship does have several hidden traps. These include the following:
BETWEEN MARRIED COUPLES:
Cab cause increased death taxes in estates valued over the exclusion amount. The exclusion amount is $675,000 for 2000 and increases gradually to $1,000,000 in 2006.
- In second marriage situations where there are children from a previous marriage, there is a possibility that the children will be disinherited.
- Example: You and your spouse own some land jointly with survivorship and you each have children of a previous marriage. At the death of the first spouse, the land will pass directly to the surviving spouse. It does not pass according to the provisions in the deceased spouse’s will. The surviving spouse is then free to will the property to his or her children. The deceased spouse’s children will not receive any interest in the land even if the deceased spouse’s will stated that they were to receive it!
BETWEEN PARENT AND CHILD:
- On the death of the parent, the child may not share the property with those of his or her brothers or sisters who were not joint owners. Even if the child does share the property with his or her siblings, there can be a gift tax if the value of what is distributed is more than $10,000.00 (indexed for inflation) per person.
- Creditors of the child may attach the property.
- To the extent that a child has not contributed to the acquisition of the jointly held property, a gift has been made to the child by the parent for gift tax purposes. if the value of the gift exceeds $10,000.00 (indexed for inflation), a gift tax will have been incurred (Note no gift is deemed to have been made on joint bank accounts and brokerage accounts in street name until the child withdraws the funds.)
- If a parent owns his or her personal residence jointly with a child, the parent’s capital gain exclusion on the sale of a principal residence will apply only to the parent’s portion of the property.
- The parent may lose control over the property because the child must consent to any sale or transfer for the property.
Note: This memorandum is intended as a summary of estate planning issues. It is not intended as specific legal advice applicable to all fact situations. You should consult a competent advisor to determine which estate planning techniques are best suited to your needs. The legal rules set forth in this outline are those that exist as of the date of this outline, (2000), and may change at any time.