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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

Certain types of jointly-owned (co-owned) assets automatically pass to the surviving co-owner at death as a “right of survivorship.”  For example, most of my married clients purchased their residence as “joint tenants with right of survivorship.”  As a legal attribute of this kind of ownership, the ownership on the property is automatically transferred to the surviving spouse at the first death between a husband and wife. Depending upon the estate planning situation and the financial situation of the clients, this may not be advisable from a tax perspective.

While a comprehensive look at your entire estate is necessary to determine whether or not joint ownership can benefit you, there are two common pitfalls to using joint ownership.

  1. Co-ownership with persons other than your spouse: Some of our clients have previously placed one or more of their children as joint tenants with rights of survivorship on their residence or bank account with the hopes that the property will automatically pass to the child upon their death. In most cases, however, it is advisable not to co-own your property with persons other than your spouse.  If your co-owner has creditor issues or is involved in divorce proceedings, a creditor or divorcing spouse may seek to compel you to sell the property, even if the property was only transferred to the co-owner to achieve estate planning objectives.
  2. Loss of full “step-up” in basis: If an asset transfers by a survivorship right, your beneficiaries lose the right to take a fully “step-up” in the cost basis of the property. Losing the full step-up may result in significant capital gains taxes to your beneficiaries.

In general, transferring assets following death through co-ownership is very easy from an administrative perspective, but is fraught with potential difficulties from a tax and legal perspective.  It is therefore very important to review your asset ownership with an attorney to determine whether co-ownership is advisable in your situation.  Also, keep in mind that (i) not all assets that are co-owned with another person have the “right of survivorship” attribute and (ii) your Last Will does not control the disposition of any assets that are co-owned with right of survivorship.