Individuals engaged in estate planning often get panicky when they hear the word “probate.”  When the term hasn’t been fully explained by a probate lawyer (and sometimes even when it has), it conjures visions of long waits, loss of inheritance, and many other hassles for heirs of an estate.

To calm these fears (and to avoid working with an attorney), many people consider the idea of adding one or more of their children to their bank accounts.  Generally speaking, each “joint tenant” of an account has complete access to the money, but when one dies, the entire amount becomes the property of the other joint tenant(s).

This may seem like a logical way to directly transfer money to heirs without going through the probate process, but a skilled probate attorney in Cary needs to keep clients informed of potential pitfalls of this approach:

• As it has already been mentioned, all joint tenants have access to the funds in the account.  This means that either party can withdraw money at any time.  If the child added to the account is not entirely trustworthy, this can be a devastating reality when the money is used inappropriately.
• Any money received by the child may be considered a gift, which means that it is subject to a variety of gift tax laws.  A Cary estate gift tax attorney will be able to keep you up-to-date on current laws and regulations in our area.
• Creditors for both parties can have access to this account.  That means that if one joint tenant dies (even the one who is not in debt), the other’s creditors can go after the money they jointly held.  Keep in mind that this means that if the child has had credit problems, those creditors may have access to the parent’s money.  This could include not just creditors, but lawsuits and divorce as well.
• Money left in the event of the parent’s death will only be accessible to the other joint tenant(s).  If one child has been responsible for the majority of a parent’s elder care and therefore is on the account, he or she will likely have no legal responsibility to share those funds with other siblings.  Again, trustworthiness is an important issue.  And even if the child wishes to share the funds with his or her siblings, there may be gift tax consequences to doing so.

If you are considering adding a loved one to a bank account as a means to avoid probate, it’s important to at least talk to a Cary probate attorney about your options. You may find that simply giving your loved one power of attorney over the account or holding your assets in trust may be more preferable based on your circumstances.

Many people believe that 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, in some cases 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 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 in the form of 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 is involved in a severe automobile accident.  As a result of the accident, Bob incurs significant medical bills.  Unable to work due to 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

In addition to 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.  As such, 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.