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Tax Matters

In estate planning, know the hazards of joint ownership Add to ...

I recall a number of years ago that the New Haven (Conn.) Register newspaper reported a story about a local woman, Joanne Kamerling, who had decided to change the ownership on two acres of land that she owned in Weber County, Utah. She placed the property into the joint names of a group of people that included a physical therapist, a prominent local attorney, the former Louisiana Ku Klux Klan leader David Duke, and O.J. Simpson. She didn’t know these people personally, none of them knew each other, and they weren’t looking to become owners. Ms. Kamerling continued to pay the property taxes. Weird.

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Yet when it comes to tax planning, Canadians often do something similar: They regularly place assets into joint names with right of survivorship. Okay, so there aren’t many of us adding O.J. Simpson to the title on our homes, but the end result is often about as effective. You see, while joint ownership can reduce probate fees and make for an efficient transfer of assets at the time of death, there can be drawbacks. Consider these 10:

1. A tax liability might be triggered. When you add another individual as a joint owner, you will often be creating a change in beneficial ownership. The result? When adding anyone other than your spouse as a joint owner, you may be deemed to have disposed of that ownership interest at fair market value, which could trigger a tax hit.

2. Your estate distribution might be inappropriate. If you’re hoping to leave an asset to, say, all of your children equally when you die, but have perhaps named just one as a joint owner to avoid probate fees, there is no requirement for your joint-owner child to share the asset with the others. This may not be your intention.

3. Family or legal disputes could result. Continuing with the scenario in number 2 above, those children who are effectively disinherited may dispute the unequal distribution of your estate, and there is no shortage of court cases dealing with these types of battles. Make your intentions clear, in writing, if you do choose to put assets in joint names.

4. You may not save tax. If you think you’ll save tax by placing assets into joint names, perhaps with your spouse, think again. Any income earned by your spouse on his or her half of the assets will generally be attributed back to you unless you charge interest at the prescribed rate. Further, owning assets jointly with a child will not allow you to escape tax on your share of the asset when you die.

5. Exclusive control over assets will be lost. If you add another person as a joint owner on an asset, you’ll no longer have sole control over the asset.

6. Assets could be attacked by creditors. If the individual who jointly owns an asset with you faces the attack of creditors, the full value of the asset you jointly own could be subject to the claim of those creditors.

7. Testamentary trusts will be impossible. It is possible, when you die, to leave income-producing assets to a trust established in your will for your heirs. This trust can pay the tax on the income earned annually after you’re gone. This can save your heirs tax. Any assets held jointly, with right of survivorship, will pass directly to the surviving owner or owners and there will be no opportunity for those assets to be place in a trust upon your death.

8. Portfolio risk profile may not be appropriate. If two or more people jointly own an investment account or portfolio it may be difficult to invest the capital in a manner that meets the risk profile of all owners on the account, particularly when there are large age differences between the owners.

9. A principal residence could become taxable. If you decide to place your principal residence into joint names with, say, a child, it may be necessary for both you and your child to designate that property as your respective principal residences in order to avoid tax on a disposition of the property later. This could be a problem if your child has, or will have, another property that he or she owns; it may expose your child’s other home to tax.

10. Joint tenancy may be permanent. Forget about undoing the joint ownership unless the other owner or owners agree to change things.

Be sure to ask yourself whether you should be concerned about each one of these potential drawbacks. This will help you to evaluate whether joint ownership is right for you.

 

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