Joint Ownership and its Risks

Joint tenancy is a type of co-ownership under which if one co-owner dies, the surviving co-owner becomes the owner of the property at the moment of death. The property does not pass under the decedent's will and does not pass through probate. But joint property can create many problems. If you take my advice, you'll "stay away from expensive joints."

It is not a good idea to make your bank account joint so that your child, or other person, can take care of your bills if you are incapacitated. The right way to do this is to name the child or other person as your agent under a power of attorney.

Joint tenancy is different than tenancy in common. Joint tenancy has the survivorship feature where the surviving joint tenant becomes the sole owner. In a co-tenancy (owned by tenants in common) each owner's share passes separately to his or her heirs or beneficiaries. There is no right of survivorship.

Many different kinds of property can be held as joint tenants or as tenants in common. The exact wording of the deed, account agreement or other document that creates the tenancy is very important. It is important to note that the name that shows on statements from financial institutions is not dispositive of the ownership. What governs is the account agreement with the institution when the account is set up.

Giving up control. By making someone a joint owner with you, you give them control of your asset. If you add another person as joint owner of your home, you cannot sell or mortgage the home unless that person agrees. The joint owner would be entitled to part of the proceeds.

Creditors. If a creditor has a claim against your co-owner, whether it's your house, or a bank account, the creditor may be able to get part of your house or account, or potentially all of it, if it is held as joint tenants.

Falling out. If you and your co-owner have a fight, the co-owner may be able to take all of the money out of a joint account.

Inheritance. If you have several children and put only one child's name on an account held jointly with you, that account belongs to that child and he or she is under no obligation to divide it with his or her siblings. In addition, the funds belong to the surviving child and cannot be reached for funeral expenses, estate administration expense or taxes. Joint tenancies don't have the flexibility of a will or trust, where you can provide alternative beneficiaries on death and specify distribution ages of the beneficiaries.

Tax planning. A carefully crafted estate plan designed to eliminate or reduce estate and inheritance taxes can be destroyed by moving assets into joint ownership.

Marriage and Divorce. Individual property may become marital property if it is transferred into joint names with a spouse.

Taxation of joint accounts

Jointly held property is very common, but its taxation is commonly misunderstood. On any joint account, the owner of the funds in the account is responsible for paying income tax on the account's earnings. Which of the joint owners receives the 1099 from the payer is not dispositive of who should pay the income tax. The bank will issue a 1099 to only one party, and the bank is not responsible for determining whose funds are in the account. It is up to the joint owners to properly report the income.

In order to avoid IRS matching problems, the taxpayer whose social security number appears on the account and 1099 should report all of the income on Schedule B (Form 1040), Interest and Ordinary Dividends. Below the entry, the taxpayer should subtract the amount attributable to the joint owner and provide the joint owner's name and social security number. That joint owner should report his or her portion of the interest.

For Pennsylvania inheritance tax, on the death of a co-owner of a joint account or any joint property, the taxable estate of the co-owner includes a fraction of the value of the property. The fraction is one divided by the number of co-tenants. For example, if three brothers are joint owners of an account, on the death of one of them, one-third of the value of the account is subject to Pennsylvania inheritance tax. Whose funds were contributed to the account are irrelevant for this purpose.

For Pennsylvania inheritance tax, joint property is taxable even if the decedent's name was added only for convenience. Assume Mother and Daughter are joint owners of an account, and one of them dies. One-half of the value of the account is subject to inheritance tax at the death of the first to die. It is important to note that even if all the money belonged to Mother, if Daughter dies first, Mother will have to pay inheritance tax on half of the value of the account. This is one of many reasons why joint property as an alternative to making a will is not such a good idea. This puts Mother in the position of having to pay inheritance tax to get her own money back. The only time this does not apply is if a child predeceases a parent before the child exceeds age 21.