Many people believe they can avoid the need for a will or probate by designating a joint owner on their property, such as a bank account or the deed to real estate. Naming a joint owner may not avoid probate, in fact, sometimes it may end up delaying the probate process.
Problems With Joint Ownership
In addition to failing to avoid probate, joint ownership can great other problems during a lifetime. By jointly owning property, you may find yourself party to a lawsuit if your co-owner is sued or the asset could be lost to a creditor of your co-owner. If your co-owner becomes incapacitated, you could find yourself “owning” the property with the co-owner’s guardian or the courts. If your co-owner is married, there is a risk of the property being subject to divorce proceedings. With something like a bank account, there is the risk that the co-owner could go on a spending spree and drain the account.
In some situations, creating a joint ownership can also create gift tax or income tax problems. Under the current income tax laws, it is often more beneficial from a tax perspective for a person to receive property by a will rather than that property being gifted to him as joint ownership during the original owner’s lifetime. In addition, adding a co-owner to property can create gift tax liabilities.
Example: Let’s assume that Mary owns a piece of real estate that she wishes her brother, Bob, to receive upon her death. Rather than designate such in a last will and testament, Mary instead adds Bob as a co-owner on the deed to the real estate. A few months later, while driving to work one morning, Bob was involved in a severe automobile accident. As a result of the accident, Bob incurs significant medical bills. Unable to work because of his injuries, Bob has difficulty paying the medical bills, and the hospital files a lien on the real estate owned jointly by Mary and Bob. As a result, the courts force the real estate to be sold, against Mary’s will, to satisfy Bob’s medical debts.
Joint Ownership Problems Specific to Real Estate
Besides the above, the nature of real estate can cause additional joint ownership problems. In the eyes of the law, real estate is considered a unique item that typically is indivisible. If a problem arises, the courts will order property to be sold to satisfy the dispute rather than attempting to divide the property. This is why, in the example of Bob and Mary above, the courts could force Mary to sell the real estate against her wishes to satisfy the hospital’s lien. Similarly, assume Bob’s accident never occurred. If Mary simply decided she wanted to sell or refinance the real estate, with Bob as a co-owner, Mary would need to obtain Bob’s approval and signature to conduct the sale or refinance, even though the property originally belonged solely to Mary.
If you are considering create joint ownership in property, you should discuss the particulars of your situation and the legal risks of joint ownership with your attorney before proceeding.
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FAQs
By jointly owning property, you may find yourself party to a lawsuit if your co-owner is sued or the asset could be lost to a creditor of your co-owner. If your co-owner becomes incapacitated, you could find yourself “owning” the property with the co-owner's guardian or the courts.
What is a disadvantage of joint ownership? ›
Having two people own the entire asset is a disadvantage in an unstable relationship, regardless of whether the relationship is personal or professional. If a couple or business partners, disagree, neither party can sell or encumber the asset without the consent of all parties.
What are the disadvantages of common ownership? ›
By co-owning a rental, you can divide the property management tasks, pool together your financial resources, and share financial burdens. However, you will lose control over decisions and need to share the profits with others.
Is joint ownership of assets an effective substitute for a will? ›
Yes, joint ownership of an account overrides a Will. The joint ownership will be effective over and supersede any directions in your Last Will and Testament regarding a specific account and how those assets are divided. Upon the death of...
What are the pros and cons of joint ownership? ›
However, it also poses certain risks.
- Key Characteristics. Joint tenancy is most associated with its right of survivorship. ...
- Advantages. ...
- Ability to Avoid Probate. ...
- Rights to Rent and Profits. ...
- Right to Survivorship. ...
- Disadvantages. ...
- Exposure to Creditors. ...
- More Responsibility.
Joint accounts are often referred to as a “poor man's Will” because they allow an individual to give assets to another upon death without going through the probate process.
What are the disadvantages of joint? ›
Disadvantages of a joint venture
- the objectives of the venture are unclear.
- the communication between partners is not great.
- the partners expect different things from the joint venture.
- the level of expertise and investment isn't equally matched.
- the work and resources aren't distributed equally.
Disadvantages of joint tenants with right of survivorship
JTWROS accounts involving real estate may require all owners to consent to selling the property. Frozen bank accounts. In some cases, the probate court can freeze bank accounts until the estate is settled.
Which tenancy is best for married couples? ›
The most recognized form for a married couple is to own their home as Tenants by the Entirety. A tenancy by the entirety is ownership in real estate under the fictional assumption that a husband and wife are considered one person for legal purposes. This method of ownership conveys the property to them as one person.
What are 4 disadvantages of the corporate form of ownership? ›
Before incorporating your business, you should be aware of these potential disadvantages: There is a lengthy application process, you must follow rigid formalities and protocols, it can be expensive, and you may be double taxed (depending on your corporation structure).
In Tenancy in Common, the ownership portion passes to the individual's estate at death. In Joint Tenancy, the title of the property passes to the surviving owner. Some states set Joint Tenancy as the default property ownership for married couples, while others use the Tenancy in Common model.
What is a disadvantage of private ownership? ›
But, operating as a private company comes with certain disadvantages. Private companies cannot access capital markets to fund growth or pay their debts. Owners may find themselves financially liable during times of distress and may face conflicts if there are disagreements between multiple shareholders.
Does joint ownership mean equal ownership? ›
The term "joint tenancy" refers to a legal arrangement in which two or more people own a property together, each with equal rights and obligations. Joint tenancies can be created by married and non-married couples, friends, relatives, and business associates.
What are the three types of joint ownership? ›
Types of Joint Ownership in California
- Tenancy in Common. A tenancy in common may be created by two or more persons or entities. ...
- Joint Tenancy. A joint tenancy may be created by two or more persons or entities. ...
- Community Property.
A joint account generally passes outside of the will because it is considered to be a non-probate asset meaning it passes directly to the surviving owner rather than through the will. In most instances, joint accounts are used as “convenience accounts”.
What are the tax disadvantages of joint tenancy? ›
If your joint owner survives you, part or all of the property may be subject to estate tax at your death. The applicable exclusion amount, described above, could reduce or eliminate any tax, depending on the value of your assets. If your joint owner sells the property, there may also be taxes owed on the sale.
What is the primary advantage of being a joint tenant with the right of survivorship? ›
Joint tenants with right of survivorship is a legal term for a way to own assets jointly, where two or more parties have equal rights and ownership of an account or real estate. If one owner dies, the surviving owners automatically get full ownership of the asset.
What happens to jointly owned shares on death? ›
If shares are jointly held, the shares pass on to the surviving holder but this process occurs outside of the actual administration of the estate. Joint name shareholdings only form part of an estate when both joint holders are deceased.
