THE PITFALLS OF JOINT TENANCY
As individuals get older, many decide to add their children's names to their homes or their brokerage and bank accounts. This is called owning something in "joint tenancy". It is a type of ownership with two or more owners who all have rights to an asset. People are told that by doing this, they will avoid probate and automatically pass to those assets to the persons named on the property or accounts. This is true, but doing this may have significant adverse consequences that most people are not aware of. Though joint tenancy is one way to avoid probate, it may not be in your best interests, or the best interests of your children, to use this approach.
First, by putting your children's names on your assets, you no longer have complete control of those assets. If you put your child on the deed of your house and you want to sell your house, then you will need their permission before it can be sold. They will have to actually sign off on the sale. This might not seem like an issue, but more often than not, it is. For one reason or another, a child may decide that they don't want their parents house to be sold. They can withhold their signature and prevent the parent from doing what they want to do with their own home. I have seen many cases where the parents had to sue their kids to sell their home. You also have to be careful that the addition of your child to your deed is done correctly. There are varying types of joint tenancy and if the wrong type of joint ownership is recorded, part of your property may still have to go through probate.
If you put your child on your bank or brokerage account, then they will have the same access to it that you would have. During your lifetime though, they will have complete access to your business. They could keep track of your spending habits, use the account to write checks for their own personal reasons, or even clean out the account and take all the money for themselves.
Additionally, if you name your child on your home or account, then you are subjecting your assets to the circumstances of your child's life, as well as your own. If your child whose name is on your house or account gets sued, divorced or files bankruptcy, his or her creditors may attempt to collect against your assets. You could have a lien recorded against those assets because your child is now a part owner. People think that they can just remove their names at the time that any trouble arises. However, that may be seen by the law as a transfer to avoid creditors and may not be allowed.
Finally, there are adverse tax consequences of including your kids on your home or accounts. Property that is transferred by inheritance, rather than lifetime gift, is given very preferable tax treatment. At death, the IRS allows a stepped up basis on your investments once they transfer into the hands of your heirs. If you don't own the whole property because your child's name is on the deed or account, you may lose out on this benefit. This may cost your kids thousands of dollars when the investments are ultimately sold.
There are other options, besides joint tenancy, that will allow your assets to avoid probate and pass easily to your heirs. By setting up a Revocable Living Trust you can avoid probate as well and not have to worry about any of these potential problems. This kind of estate planning allows you to maintain complete control of your assets during your lifetime, while also accomplishing the goal of avoiding probate and giving your family the immediate access to your assets that makes joint tenancy seem like such a desirable solution.