Why the use of a General Durable Power of Attorney is superior to Joint Ownership with Rights of Survivorship

It may be easy to add someone as an owner with survivorship rights to your real estate or other property, but the simplicity of this action does not offset the risks associated with co-ownership. Many individuals either make the decision on their own, or with the advice of someone with practical knowledge about re-titling assets, to add a child or another intended beneficiary as the owner of their real estate, bank account, or other asset. The premise is rather simple: ownership with someone who has a right of survivorship, known as joint tenants with rights of survivorship, avoids probate at the death of the first owner, thereby leaving the surviving owner, (typically the younger intended beneficiary), with full ownership rights and no court involvement. Additionally, the objective of many is to make sure that someone, usually an adult child, has access to the original owner’s assets so that they can handle their financial affairs if that person is unable to do so on their own.

The objectives of avoiding probate at death and providing someone with access to financial means for care can be met by adding an individual as an owner to an asset. But the risks are far too high to approach these objectives in this way.

Probate avoidance at death generally involves planning that either utilizes a trust adopted by the individual owner of the asset, along with funding through transfer of assets to the trust, or, an individual may use non-probate transfer tools to make sure each asset transfers to its intended beneficiary outside of probate. Think of Transfer on Death (TOD), Pay on Death (POD), life insurance beneficiaries and beneficiary or transfer-on-death deeds. There are times when planners will utilize both a trust and a series of non-probate transfers. The point is that there are alternative methods of avoiding probate at death. These methods are used for a variety of reasons, many of which are illustrated below in a conversation about General Durable Powers of Attorney.

Adoption of a General Durable Power of Attorney (DPOA) is one of the most powerful probate avoidance tools available. Utilized during one’s life, the DPOA can authorize someone to act on another person’s behalf to make financial decisions. So, if you are incapacitated or disabled, your Attorney in Fact under the DPOA could access your checking account to pay your bills, sell your house if you were going into a nursing home, and make other financial decisions for you without a formal court order or the costs associated with that proceeding.

The General Durable Power of Attorney is a superior option to joint ownership for a variety of reasons. To begin with, when you add a person as owner of your property, that person will have equal rights to the property. This is a loss of control for you. This ownership option provides either owner with total access to the property. So, for example, if your pension or other income is deposited into a jointly owned bank account, the joint owner could legally remove 100% of that deposit for his or her individual use. Naming the same individual as your Attorney in Fact under a DPOA merely gives them rights to use your property for your benefit only. They are statutorily prohibited from using your property for their benefit. They merely have access to your property for your use and benefit, rather than acquiring any form of ownership interest allowing them to use the property for their own benefit.

From a tax perspective, it is more advantageous to continue to own the entire property in the name of the person who is thinking of transferring title. When you add an individual as a co-owner, you are actually giving them a gift equal to one-half of the value of the property at that time. If the value of the property exceeds the annual gift tax exclusion, (currently $14,000 for 2013), then you are required to file a gift tax return. Additionally, at your death, any built in gain from that part of the gifted asset will be subject to capital gains at the time your intended beneficiary sells it. This is due to the fact that the gift provides a carry over basis equal to the basis of the donor, while a death time transfer equates to a stepped-up basis to fair market value at date of death. So, if you have owned your home for 40 years and you deed half to your child, you have a basis equal to the cost of the home 40 years ago plus a variety of increases for certain improvements, etc. Likely the price has appreciated over the years and there is a built-in gain. That built-in gain merely transfers to your intended beneficiary at the time of the gift and when the home is ultimately sold, a tax will be paid by the intended beneficiary on this built-in gain. This could be avoided if the house remained in the donor’s name until death, at which point the intended beneficiary received a stepped-up basis to date of death value. This benefit most likely eliminates tax consequences presuming the home is sold shortly after date of death A similar analysis would occur for other assets, such as securities.

From a risk management perspective, joint ownership is objectionable because your assets become subject to creditors of the co-owner. So, if you add a child as owner of your home or bank account and that child is going through a divorce or has judgments outstanding to creditors, your asset could be used to satisfy those creditors. Furthermore, as joint owners, you could be held responsible for the other owner’s actions while using a jointly owned asset. Probably the most common example here would be a car accident where you get sued for being a co-owner of a car you weren’t even driving.

From a business owner’s perspective, joint ownership is particularly problematic for risk management. If the business operates as a sole proprietorship, adjusting ownership so that an intended beneficiary is a co-owner creates many negative tax consequences and the entire business operations could become subjected to the liabilities of the new co-owner. Should that new co-owner file for bankruptcy, the bankruptcy trustee will have a high level of interest in the operations of the business venture to determine how it’s cash flow and assets can satisfy the new co-owner’s debtors. Fundamentally, it is also possible to alter ownership interests in corporations, limited liability companies and other business organizations. Similar risk is involved in that new co-owners bring a whole host of potential creditors and liabilities that could affect the viability of the business in an unintended way.

The adoption of a General Durable Power of Attorney, in combination with a review of business operation documents, such as bylaws, operating agreements, buy-sell agreements, etc., could effectively protect the business from involvement by the Court if an owner is incapacitated and can’t function on their own. It would likewise eliminate concern for the above issues as created by a joint ownership situation.

Should you have questions about General Durable Powers of Attorney for your personal or business situation, please don’t hesitate to contact our office.