As parents age, children begin to consider how mom or dad’s accounts and finances will be managed; or they start to consider the logistics involved in moving accounts or property after a parent has passed. The answer many clients come to is to put themselves on the account or name themselves jointly on a house or other asset. Having joint accounts and other assets held jointly does avoid probate and does allow control over assets once mom or dad is unable to manage the accounts themselves, however, great caution and consideration should be taken before joint ownership is established.
Most people don’t consider what will happen if the joint owner becomes subject to a divorce, a lawsuit, or a bankruptcy proceeding. Although an adult child may be on an account for management and convenience, legally they are considered to be a partial owner. If a joint owner is sued or divorced, mom or dad’s assets could be subject to those proceedings. Even if an adult child avoids any legal pitfalls, consider also that once mom or dad passes, the joint owner becomes the full legal owner of any asset. If there is more than one child, the other children may not be legally entitled to any of mom or dad’s assets.
Let’s consider Jeanie… Jeanie is getting older and managing her bank accounts, bills, and her home is becoming too much. Jeanie’s daughter, Allison, lives twenty minutes away and has decided it’s time to take over caring for mom. Jeanie adds Allison to her checking and savings account, and adds her as a joint owner on the family home. Jeanie has two other children: Adam and Jeff. Adam lives in California and Jeff travels for work, so they all agree that Allison is the best person to pay mom’s bills and help care for her. None of the children want to deal with probate either, so adding Allision to the deed is viewed as the best decision. Now let’s look at three ways this plan may not have the intended outcome:
- Two years after being added as joint owner, Allison and her husband Berry get divorced. Berry’s attorney argues that Allison owns half of mom’s savings and checking accounts and the home since she is named as joint owner. Allison tries to prove that the accounts are mom’s only and she just manages them, but since Allison has been caring for her mom so much, she has mixed her own money into the account at times and borrowed from mom’s account. Mom’s assets become subject to the divorce agreement.
- Allison is in a car accident on her way to work and is sued by the other driver. The lawsuit exceeds the amount her insurance covers and she could be personally liable for the remaining amount. The plaintiff’s attorney sees that Allison is the joint owner of mom’s bank accounts and mom’s home and argues those assets should be used to pay the full amount of the judgement. Allison makes the same argument as scenario one, but runs into the same problems.
- Allison isn’t sued and doesn’t get divorced and mom lives five more years. Once mom does pass, Allison is the sole owner of mom’s checking and savings accounts, and her home. Although mom had a Will that left everything to her three kids equally, the only one who is legally entitled to any money from the checking or savings account, and who is the legal owner of the home, is Allison. Allison argues that although mom clearly wanted the money split between her children, she was the one who spent the last five years taking care of mom and she should be entitled to more since she did more. Adam and Jeff have no right to the funds and have been disinherited, although that was clearly not mom’s intent.
- Even if Allison and her brothers work out everything and Allison is not sued, when Allison goes to sell the home, the cost basis Allison has in the home is Jeanie’s cost basis. This means Allison has to pay capital gains on the appreciation of the home. If Allison’s name had not been added to the home while Jeanie was living, the cost basis would have “Stepped-Up” to the value of the home on the date of Jeanie’s death and capital gains would have been avoided or at least minimized.
Sometimes the easiest solution isn’t always the best. A good estate plan considers the possibilities and plans for the unexpected. At Grissom Law we help clients plan for every situation, call us today at (678)781-9230 to schedule an appointment.
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