Today I want to discuss the main problems with joint ownership of property. I’ve talked to many people who think that joint ownership (also called “joint tenancy”) of property is a great and inexpensive way to avoid probate. They are correct that joint ownership is one way to avoid probate, but the problems with joint ownership can greatly outweigh the potential benefit of avoiding probate.
How can Joint Ownership avoid Probate?
Let’s start with a quick overview of what joint ownership means, and why so many people use this as a means to avoid probate.
If you own a property, which could be a home, investment account, or other bank account, you have the option to title it however you would like. You could own it by yourself, you could own it as trustee of a trust, or you can own it jointly with another person.
When you own a bank account or piece of property jointly, both you and the other owner each have complete access to the property, and you each have what is called “right of survivorship” or ROS. That means if either of you should die, the property or account would immediately transfer to the other person. The property would avoid probate in this way.
You can see how, upon initial glance, this might be a great estate planning tool for some people. But let’s take a look at some of the problems with joint ownership.
The Main Problems with Joint Ownership
There are numerous problems with joint ownership, which in many cases would negate any benefits you would have from using joint ownership as an estate planning tool.
If the person you own the property jointly with gets sued, that asset could be used to satisfy a judgment. If the co-owner is married and decides to get a divorce, this asset could become part of the divorce proceedings. If your co-owner becomes incapacitated, then you could be forced to own the asset jointly with a guardian you don’t know, or even have it manage by the court.
And while all of these possibilities seem far-fetched, they aren’t. They happen each and everyday.
But of the three possibilities that I just referenced, the most concerning to me is the situation where someone becomes incapacitated. In most situations, people will own property or a bank account jointly their spouse if they are married. This includes the cars and the marital home.
If your spouse became incapacitated, and you own your house or vehicles in joint name, then your options are limited as to what you can do with that asset. If you needed to sell your house to help pay medical bills, or for any other reason, you can’t do that without the consent of your spouse or the court. That means that instead of having the freedom to sell your home or car to get cash, you would have to hire a lawyer to file a guardianship lawsuit to get permission to sell that asset.
Other potential problems with joint ownership
But these aren’t the only problems that can come up. Let’s say you decide to purchase an investment property with close family member. You invest all the money and your brother puts in the “sweat equity” because they don’t have the sufficient financial means to invest into the property. Turns out they are actually a serious credit risk.
After you buy the property, your brother gets sued by creditors who attach a lien to the property. Now, instead of a nice investment property, you just paid for all your brother’s creditors. And since the creditors don’t want an interest in your investment property, the court forces you to sell it to satisfy the lien.
Should You Use Joint Ownership as an Estate Planning Tool?
Basically, it depends. For some people creating a joint tenancy may truly be a smart legal decision. For many more, it will create more problems than you may realize.
If you have questions, we recommend that you talk to an estate planning attorney to clarify whether a joint tenancy is appropriate in your situation.