Periodically I write about the perils of Joint Ownership, and it’s time for another update. My clients keep telling me about their joint accounts with their children’s names on them. When I inform them of the possible pitfalls they are always shocked. I recently heard a first hand example of another disastrous result.
Joint Ownership means that two or more people own an asset, each having a complete and undivided interest in the property, usually along with a right of survivorship. Right of Survivorship means that the last living joint owner has the entire rights to the property. Joint Ownership is often used with Real Estate, Bank Accounts, Savings Bonds, and Certificates of Deposit.
The biggest advantage of joint ownership is that it is quick and easy. You just add another’s name to your bank account, and they have immediate access to the funds, and they will automatically own the funds if you pass away, without probate or other paperwork.
However, there are several drawbacks to joint ownership. The biggest may be that the problems of a joint owner can cause loss of the asset. Jointly owned property could be seized by the creditors of any one of the owners. A co-owner’s unexpected liability could effect the asset.
Parents may not expect their children to have financial issues, but they can arise unexpectedly. One example is that a co-owner of a business, plus a President, Vice-President, or Treasurer of a corporation, each have personal liability if the business does not properly fund its payroll taxes.
Your son, the co-owner of a business, may not take care of payroll. His partner may be dealing with temporary cash-flow problems by withholding taxes and Medicare from employees’ checks, but not turning the funds over to the IRS. When the IRS figures it out, they may seize the accounts of your son, who is personally liable for that debt (plus the 100% tax penalty assessed for this violation.) If your son’s name is on your savings account, the IRS will be withdrawing a tidy sum from it. This is almost precisely the example that was related to me the other day.
Joint ownership is a simple planning tool. It can be a quick and easy way to avoid probate. But there are pitfalls and problems. You must be prepared to accept the risks of joint tenancy, before you use it. There are other planning tools such as Powers of Attorney, and Pay on Death designations that reach the same goals, without the risks of Joint ownership. If you are not sure of your situation, seek professional guidance before you take any action.