Joint Ownership: Rethinking America’s Most Common Form of Ownership
By Amy LeFore
SAALFELD GRIGGS PC
One of the most common forms of ownership is joint ownership. I often encounter the situation where individuals are using joint ownership as their primary estate planning tool. The basic premise of joint ownership is that, upon the death of one owner, the property passes directly to the other owner. The allure of joint ownership is the perceived simplicity that it provides. However, in reality there are a number of complexities that can arise from joint ownership.
One of the problems with joint ownership is increased creditor liability. The most common situation exists when a parent adds a child to their account and that child, in turn, develops creditor problems. Oregon law states that a creditor can access a joint account, but only to the extent to which the individual subject to creditor’s action has contributed to the account. This offers some protection for the innocent party; however, a parent may then find themselves in a situation where they must prove that they are the only individual who contributed to the account. Having one’s assets examined by creditors is certainly uncomfortable and intrusive. Further, joint ownership can contribute to increased creditor liability, even in the context of marriage. It is not uncommon for one spouse to own most of the assets where the other spouse is involved in a heightened liability profession. Thus, the heightened creditor risk can be a motivating factor for individuals to explore alternatives to joint ownership.
Second, many individuals do not realize that joint ownership can adversely affect estate tax planning. Oregon currently allows an individual to transfer $1 million at their death to any person free of estate taxes, and federally they can transfer $2 million without triggering estate tax. Additionally, transfers at death to a spouse are unlimited. Through the use of estate planning techniques, a married couple has the opportunity to double these exemptions. The basic plan to double the exemption amounts requires that the first spouse to die leave property to future beneficiaries by means of a trust. This trust would allow the surviving spouse to access the income and principal, if needed.
This type of planning allows for the utilization of the deceased spouse’s estate tax exemption. This is vastly preferable to leaving property outright to a surviving spouse through joint ownership because if the surviving spouse receives all of the property outright and then passes away, the couple will have only used one estate tax exemption. If the property is owned jointly, then all of the property passes directly to the surviving spouse and will never pass through the decedent’s will in order to utilize the estate tax savings provisions. While joint ownership may provide simplicity, it can be very costly for the children because only one estate tax exemption was used. For example, the loss of one Oregon exemption, which is worth $1 million, could cause an additional $99,600 in Oregon estate tax for the beneficiaries.
Another issue resulting from joint ownership exists when a couple enters into a second marriage with each spouse having children of their own. The couple may diligently complete their estate planning and may even do separate plans with each plan benefiting that person’s respective children. However, if all property is owned jointly then all of this planning is irrelevant upon the death of the first spouse. By law, when one joint owner dies, full ownership passes to the surviving owner. This would mean that the surviving spouse would have full control of the property and its distribution upon their own death, despite the terms of the decedent’s will.
As mentioned above, a common use of joint ownership as an estate planning tool is to have accounts, or even real property, owned jointly between a parent and a child. As you might imagine, this can bring unexpected results. First, the act of adding an individual to an account or to property where that individual has not contributed any of the assets necessary to purchase the property is a gift to the non-contributing joint owner. If the “gift” is over the annual gifting exclusion ($12,000 for 2008), then a gift tax return must be filed. Further, upon the death of the parent, the child will receive automatic and full ownership of that account or property even if there were other children. At that point, it is up to the joint owner child to correctly distribute the property to their siblings. This is not always accomplished in the parent’s intended fashion. The distribution of substantial amounts of property to siblings may force a child to exceed their own annual gifting exclusion in order to transfer the property and accomplish the desired result. Further, this assumes that the child will “share” with the siblings. One can see that a supposedly easy transition through joint ownership can turn into a very complex problem.
A peculiar issue arises with joint ownership among married couples when one spouse is not a U.S. citizen. If both spouses are U.S. citizens, there is unlimited gifting that can occur between the spouses. In other words, if one spouse purchased a home with their own funds and then elected to add their spouse as a joint owner, this would not trigger any gift tax consequences. However, if this same transaction occurred between a citizen and non-citizen spouse, the maximum amount that can be gifted in 2008 is $128,000, and any excess amount would trigger the need to file a gift tax return. This is true of any situation where the citizen spouse is taking property jointly owned with a non-citizen spouse and there is unequal contribution. Consequently, joint ownership between citizen/non-citizen spouses contributes yet another layer of complexity to joint ownership.
Joint ownership is not a substitute for proper estate planning. Individuals can achieve the same objectives of joint ownership through various estate planning techniques, while avoiding the pitfalls of joint ownership mentioned in this article. While there are appropriate uses for joint ownership, it should be done within the context of a comprehensive estate plan tailored to accommodate the individual’s true objectives. In my experience, the use of joint ownership in estate planning is an exception to the general rule and a planning choice that should be carefully considered.
If you have questions regarding this article or would like assistance in estate planning, please contact a member of the firm’s Estate Planning and Probate Group.