The Living Trust: A Better Option to Joint Ownership
Table of Contents
- How Joint Ownership Can Backfire
- Does Joint Ownership Avoid Probate?
- Other Problems With Joint Ownership
- How a Living Trust May Help
- An Attorney Can Help
While joint ownership of real estate is a popular method for avoiding the probate process in the event of an owner's death, this arrangement also has its drawbacks. Generally, real estate may be seized or at least considered as an asset for all owners, including joint owners who were added to a title for the very purpose of avoiding or delaying probate court. In other words, each joint owner adds to the legal exposure of a given piece of real estate.
This article discusses the risks involved in joint ownership and how a living trust may be a better option.
An Example of How Joint Ownership Can Backfire
A doctor and her husband are building their dream home in the suburbs of Atlanta. The loan application is submitted and the closing attorney is instructed to prepare the transfer documents. Both the mortgage and the deed for the joint property is prepared in their names.
This is actually a common scenario. However, the married couple has exposed their most valuable asset to the liabilities of both partners, including the high lawsuit risks of the doctor. Without proper planning and forethought, this family may be headed towards a forced sale of the home to satisfy a judgment. Not only does the doctor in trouble lose her home, but so does her family.
Ownership in the property may be just the incentive that a creditor or a potential plaintiff needs to pursue a lawsuit. If the joint owner otherwise has no substantial assets or property interests, it could be an unexpected windfall and guarantee that a lawsuit will be filed.
But Doesn't Joint Ownership Avoid Probate?
It may. But only upon the death of the first owner and if the property is owned as joint tenants with a right of survivorship. But when the second owner dies, the property would still need to be probated.
If the property is owned as tenants in common, then probate would not be avoided even upon the first person's death. This is why a living will may be a better option to joint ownership in many cases.
Note: States that recognize tenancy-by-the-entirety or community property also allow a property to pass to spouses without probate.
What Other Problems Can Joint Ownership Present?
In addition to the fact that joint ownership only delays probate until the second owner's death, the arrangement may also present the following issues:
- If you are the first to die, you may lose control over the asset (neither your will nor your trust controls what happens to the property).
- A remarriage may result in your children being disinherited, not willfully, but due to poor planning.
- Adult children may lose jointly owned property to debts or divorce (your hard-earned property could end up in the hands of an ex- son or daughter-in-law with a good divorce attorney).
- Your co-owner could transfer their shares to someone else without your knowledge or approval.
- If one of the owners is in a high-risk profession, like a medical doctor, then all the property is subject to the high risk, even the portion owned by the non-doctor owner.
- There are gift tax and estate tax consequences that could be extremely detrimental, especially if your estate is larger.
- It is very difficult to remove a co-owner from an asset's title without their complete cooperation.
- Adding a child or a non-spouse to the title of property you purchased could trigger a gift tax liability.
A Better Option to Joint Ownership: How a Living Trust May Help
A living trust is a revocable trust that is set up during your life. Most of your assets are then titled in the name of the trust. You maintain complete control of the trust during your life and can add or remove assets. Upon your death, the assets in the trust are distributed by your named trustee (usually your spouse) to your named beneficiaries, without probate.
A living trust maintains your family's financial privacy, provides an easier and more efficient administration of your estate, and can protect dependents with special needs. A living trust is easy to set up and maintain and can be changed or canceled at any time.
A living trust is usually drafted to include the following additional benefits:
- A credit by-pass trust that allows both you and your spouse to use your federal estate tax exemption
- An asset protection trust that keeps assets in a trust until the beneficiaries reach the age at which you want them to inherit
- A delay on estate taxes until the surviving spouse dies
- Control over who will eventually receive the assets in their trust document
- Prevention of court control of assets when someone is physically or mentally incapacitated
Looking for a Better Option to Joint Ownership? An Attorney Can Help
It's hard to predict exactly what will happen with your property after you pass on, especially if you have concerns about in-fighting amongst your loved ones. Whether you should jointly own your property now or create a living trust depends on your circumstances. For informed legal advice, consider speaking with a local real estate attorney.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
Contact a qualified real estate attorney to help guide you through the home buying process.