We've been asked a lot about Joint ownership verses Powers of Attorney. In the event of incapacity many people add a second person to their bank accounts. "I have my son/daughter on my account with me." or "Why can't I just add my neighbor who helps me out when I need it." "Why should I get a power of attorney instead, when I can just add a joint owner?"
These are common misconceptions to achieving the goal of getting help if needed. The problems with joint ownership, and yes I said problems plural, are far reaching and usually unknown to the client.
Pitfalls to Joint ownership:
-LOSS OF CONTROL:
If you are a joint owner you lose total control over that asset. If it's real property, you cannot sell, mortgage or refinance it without the consent of all the owners. By adding a child or neighbor or grandchild to your deed, you have given them that asset early, and they now control along with you. If they disagree with your decision, they can hold you up on doing what you want to do with your own property. If it's a bank account, they can go into the bank and use the bank funds as they see fit, without regard to you.
-TAX LIABILITIES: When you add a joint owner you have gifted your property. If a bank account, half of that money is attributable to the new owner. Same with real property. If that amount is greater than the annual allotted gift by the federal government of $14,000 there could be significant tax consequences. If it is over the life time limit, there could be additional tax consequences.
-LONG-TERM CARE LIABILITY: In the event that any long-term care needs are necessary in your future, a joint ownership could be deemed as gifting. There is now a 5 year look back period. If you have gifted within the last 5 years, you could be penalized by that amount.
-CREDITORS OF ALL OWNERS: Adding a joint owner opens the door to the creditors of that new owner. Just because they never contributed funds to that account, doesn't mean a creditor won't garnish the entire amount inside that account, or lien property in order to recover on the debt. The asset is subject to the creditors of each owner.
-TRUMPS DISTRIBUTIONS IN YOUR WILL/TRUST: Some people have prepared for the end of their life and put into place a Last Will and Testament, or Living Trust. Within that document, they listed who was to receive their assets and how much. What many people don't realize, is that titles and licenses trump your estate plan. This is why attorneys emphasize the importance of making sure all your account assets match the desires of your Estate Plan. If you add a joint owner in the event of your death or disability, the survivor of the two of you takes it all. They are under no obligation to share with siblings, friends, charities, etc. as indicated in the Will.
-DISABILITY POWERLESS: just because you have a joint owner on your bank account does not mean they have the express power to pay all bills, or assist with all finances. If they have to call consumers, or AT&T they have no authority to do so. And many joint owners run into problems as they use the assets for another's needs. It has the potential to create many financial problems.
THE SOLUTION: A Durable Power of Attorney. A power of attorney is a document in which you select an agent to act on your behalf in the event that you cannot. The agent is given the powers to do all that they could have done had they been a joint owner, but without any of the cost or liability to you.
So my question is:
Why not a Power of Attorney?