I make a point of getting my hair cut once a year, whether I need it or not. This week, I was chatting with a neighbour.
"Tim, who cuts your hair?" she asked.
"Why, is there something wrong with it?" I replied.
"Just tell me who cuts your hair," she said.
"My barber, Lee," I replied. "He's been our family barber for years. He knew my grandfather, and still cuts my dad's hair. He's 94 years old."
Lee is not exactly the Wealthy Barber incarnate. He's been making mistakes with his money (and evidently my hair) for years. That's why he's still working. Lee jokes that his customers ask him what he does with his money, then they do the opposite. Lee recently told me that he has all of his assets in joint names with his son. Sorry Lee, but let me explain why this can be a bad idea.
The term "joint ownership" is loosely used to described one of two common legal relationships: tenants in common, or joint tenancy with right of survivorship. The difference? Tenants in common owners each hold separate ownership interests that can generally be sold or transferred without the consent of the other owners. When one of the owners dies, that share of the asset is transferred by the owner's will to his heirs.
Joint tenancy with right of survivorship is different. The survivorship feature means that when an individual joint tenant dies, the deceased person's interest is automatically distributed to the remaining joint tenants. Think of this as a "winner takes all" game. The asset will pass to the surviving owners outside of the probate process. The result? Probate fees are avoided.
Next to enjoying a cinnamon Beavertail pastry while watching Hockey Night in Canada, Canadians enjoy nothing more than joint tenancy, so it seems. After all, no one likes to pay probate fees.
I've talked about the problems of joint tenancy before (see my article, June 9, 2001, at http://www.timcestnick.com). But there are more problems. In addition to triggering a potential tax bill when adding a joint owner (which can happen since you are generally transferring beneficial ownership), and subjecting the asset to any creditors of the other owner(s), consider four other drawbacks.
Unintended distribution of assets.
I've seen a parent name a particular child as an owner in joint tenancy with the expectation that the other children will also share the asset when the parent dies. Think again. There is no requirement for the child who is the joint owner to share that asset with anyone else.
Control over the asset is gone.
Holding an asset in joint tenancy will cause you to give up control over the management and disposition of the asset. You'll need the consent of your joint tenant to do anything of significance.
Creates taxes on a residence.
Many people like the idea of placing their home in joint tenancy with an adult child to avoid probate fees. If that child already owns her own residence, or is expected to purchase a home, she may eventually pay tax on the sale of one of the properties since she'll be entitled to fully shelter just one residence from tax using her principal residence exemption. It may be possible to shelter both homes from tax if you avoid joint tenancy.
Joint tenancy cannot be undone.
If you decide later that you'd like to take back full ownership of the asset yourself, it'll be too late. This won't happen without the consent of the joint owner.
Tim Cestnick, FCA, CPA, CFP, TEP, is author of Winning the Tax Game 2004, and The Tax Freedom Zone. He is managing director, Tax and Estate Planning, AIC Limited.
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