There’s a common misconception that owning assets jointly with a child or other heir is
an effective estate planning shortcut. While this strategy has a certain appeal, it can invite
a variety of unwelcome consequences that may quickly outweigh any potential benefits.
Owning an asset — such as real estate, a bank or brokerage account, or a car — with your
child as “joint tenants with right of survivorship” offers some advantages. For example,
when you die, the asset automatically passes to your child without the need for more
sophisticated estate planning tools and without going through probate.
But it can also create a variety of costly headaches, including:
- Avoidable transfer tax exposure. If you add your child to the title of property
you already own, it may be considered a taxable gift of half the property’s value.
And when you die, half of the property’s value will be included in your taxable
estate.
- Increased income tax. As a joint owner, your child loses the benefit of the
stepped-up basis enjoyed by assets transferred at death, exposing him or her to
higher capital gains tax.
- Exposure to creditors. The moment your child becomes a joint owner, the
property is exposed to claims of the child’s creditors.
- Loss of control. Adding your child as an owner of certain assets, such as bank or
brokerage accounts, enables him or her to dispose of them without your consent
or knowledge. And joint ownership of real property prevents you from selling it
or borrowing against it without your co-owner’s written authorization.
- Unintended consequences. If your child predeceases you, the assets will revert
back in your name alone, requiring you to come up with another plan for its
disposition.
- Unnecessary risk. When you die, your child receives the property immediately,
regardless of whether he or she has the financial maturity and ability to manage it.
These problems can be mitigated or avoided with one or more properly designed trusts.
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