6 Reasons Not to Elect Joint Ownership

Joint ownership is one of the most common forms of asset titling. It offers numerous benefits centered on sharing use and control, it allows transparency of assets and it helps with daily money management and bill paying.

While the decision to jointly title assets often seems straightforward, there are underlying considerations to be taken into account, particularly when it comes to non-spousal shared assets. For the following reasons, think carefully before you sign on the dotted line to initiate joint ownership with a significant other, family member or friend.

Beware of titling assets jointly if you think any of the following may apply to you:

1. Lose Claim to an Inheritance 

Inherited family money is often protected in the event of a divorce with a primary caveat: You must keep the monies discretely in your name and traceable to the originating inheritance event. If your inherited assets are jointly retitled or invested in joint property, such as your home, they become marital property and would likely be subject to division during a divorce. (For related reading, see: The Benefits and Pitfalls of Joint Tenancy.)

2. Undermine the Prenuptial

Some prenuptial agreements require maintaining separate ownership of assets post-marriage. Mixing marital assets into premarital accounts, or accidentally titling them in joint names, can undo all of your legal efforts. Another common mistake in prenuptial arrangements is entering into a jointly owned property agreement without obtaining an ownership agreement. Always consult your financial advisor and attorney in advance.

3. Buy a Property With a Non-Spouse

While ownership agreements are strongly recommended between spouses who have signed prenuptial agreements, they’re essential between non-spouses.

Think ahead to all the circumstances that might cause one party to disagree or exit the ownership structure. For example, you might disagree about the costs of a home’s upkeep, the relationship may not last or one party could become disabled or even die. It’s essential to have a legally binding agreement that gives clear guidance to resolution in these or other possible scenarios that may occur in the future. (For related reading, see: 5 Common Problems of Buying a House With a Friend.)

4. Upset an Equal Estate Distribution

One of the most common estate oversights pertains to accounts established jointly with one child. The objective is often just to allow that child to help with bill-paying or general financial oversight. However, if the account is titled as joint with rights of survivorship, this affords the joint account holder future ownership of the account, regardless of what your estate documents dictate. If you have more than one child, make sure that any jointly titled assets don’t upset any intended equal estate distributions.

5. Transfer Low Cost Basis and Tax Exposure

People often forget about taxes when they transfer an individual asset into joint names, or transfer ownership outright. In either event, you’re making a gift of an asset. At the same time, you’re transferring your cost basis (what you paid for the asset and what’s used to calculate a future capital gain). If you have low cost basis in an asset (meaning that the amount you paid for it was less than today’s value), you’re potentially shifting an unintended tax burden to the new joint owner. This applies both during your lifetime and upon your death, as assets gifted during your lifetime don’t receive a step-up in basis at the time of death. Be sure to evaluate the tax impact and apprise your new co-owner of the cost basis that’s transferring as part of any joint ownership transaction. (For related reading, see: Why You Need to Know Your Cost Basis.)

6. Expose Yourself to Creditor Claims

Once an asset is titled jointly, both owners gain ownership and the assets become liable to potential creditor claims. If you’re married, ownership under the structure of tenants by the entirety can help to mitigate creditor claims (unless you’re both jointly liable). However, there’s little protection available to non-spousal joint owners. As such, be sure to think about the risks you could be assuming by jointly titling your assets.

When it comes to finances, keeping things simple can often be the best approach for you and your loved ones. However, if you’re considering joint ownership to achieve simplicity and equalization, be sure to carefully evaluate the full dynamic of the ownership structure to make sure you’re not mistakenly complicating things in the long run.

(For more from this author, see: 8 Ways to Prepare Your Finances for Inflation.)

 

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