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Part 4 – The Risks of Jointly Holding Property in Your Estate Plan

One of the most popular estate planning strategies involves transferring property titles, such as a house or bank account, into joint ownership to avoid probate fees. While this approach may seem advantageous on the surface, it carries a host of risks and potential complications. 

In this blog, we’ll delve into the pitfalls associated with jointly held property in your estate plan and explore alternative methods that can help you achieve your goals without exposing your assets to unnecessary vulnerabilities.

 Loss of Control

Transferring property into joint ownership can create a significant loss of control. The other person on the title gains legal ownership and is presumed to have beneficial ownership. Having an additional person on title may necessitate their authorization for various actions related to the property, including accessing accounts, managing a mortgage, or even selling the property. Careful consideration is essential to avoid unexpected complications and disputes.

Principal Residence Exemption (PRE) Concerns

For houses, there’s a critical consideration regarding the Principal Residence Exemption. The Principal Residence Exemption allows someone to sell the house they primarily reside in, free of capital gains taxes. If the joint ownership arrangement is not adequately documented or executed, it could jeopardize the exemption, triggering unnecessary taxes. When title to a property is transferred to someone, it is presumed that they own both the legal interest and the beneficial interest in the property. By transferring the beneficial interest to a portion of the house to someone who does not reside there, their share of the ownership may not qualify for the PRE. In effect, the transfer of property title to avoid Estate Administration Taxes may lead to significantly higher capital gains taxes down the road.

Lack of Documentation and Costly Litigation

Failing to meticulously document your intentions when transferring property titles can have dire consequences, potentially resulting in costly litigation for your estate. In cases where assets, including property titles, are gifted without clear documentation as to the parties’ intent, a legal presumption known as a resulting trust comes into play. Under this presumption, it is assumed that the recipient holds the property in trust and is obligated to return it to the original owner or their estate.

Consider a scenario where an individual transfer’s title of their house jointly to an adult child with the intention that the child inherits the house. If this intent is not adequately documented, the court may infer that the adult child is holding the property trust, leading to the necessity of its sale and subsequent distribution according to the deceased’s will. This can precipitate disputes and legal expenses that deplete estate assets, ultimately nullifying the original purpose of transferring the property to avoid Estate Administration Tax. Notably, litigation over resulting trusts has emerged as one of the most prevalent forms of estate litigation, underlining the critical importance of clear and comprehensive documentation in estate planning.

Exposure to Liability

One unintended consequence of including your adult child on the title of your assets is the potential exposure of the asset to your adult child’s creditors. When your adult child’s name is added to the title, it could become vulnerable to actions by your child’s creditors, including the possibility of asset seizure. This exposure can arise in various scenarios, such as your adult child facing bankruptcy, garnishments, judgment writs, or income tax liens.

Unintended Estate Distribution

Similar to the scenario discussed in our blog “Strategies for Reducing Estate Administration and Capital Gains Taxes,” adding your children to the title of assets may lead to the distribution of your estate in a manner that does not align with your intended wishes. Suppose your will specifies that your estate should be evenly divided among your children, but one of your children is listed on title of specific assets as a joint owner. In that case, those assets may not be considered when calculating the overall value of your estate. Consequently, the child named on title may receive considerably more substantial benefits than your other children, potentially resulting in an unequal distribution of assets. This underscores the importance of meticulous estate planning to ensure that your wishes are carried out accurately. 

Effective Estate Planning Alternatives

Fortunately, there are alternative estate planning methods that can help you achieve your goals without exposing your assets to some of the risks mentioned above. One effective strategy involves gifting the right of survivorship through a trust to an intended beneficiary. This approach allows you to avoid Estate Administration Tax while preserving the Principal Residence Exemption on the entire house. Furthermore, it resolves the problem of documenting intent for the gift. However, it’s crucial to emphasize that this strategy must be properly documented to ensure its effectiveness and legal validity. While trusts have historically served as effective tools for estate planning, recent changes in the taxation of trusts, coupled with burdensome reporting requirements, have notably diminished their overall effectiveness. Consequently, trusts may now offer benefits only in specific, limited circumstances. 

Takeaways

While transferring property titles to jointly held arrangements may seem like an attractive way to reduce Estate Administration Taxes, it comes with a multitude of risks, including loss of control, potential Principal Residence Exemption complications, and the potential for costly litigation. As an alternative, consider exploring effective estate planning methods that can help you achieve your goals while preserving the integrity of your assets. Proper documentation is key to ensuring that your wishes are carried out without unnecessary complications or disputes. For skilled and professional guidance on estate planning strategies tailored to your unique circumstances, contact our experienced team members at Pavey Law. Stay tuned for more insights into estate planning in our upcoming blogs.