Think twice before making assets joint with a child

This article refers to joint tenancy with right of survivorship, whereby on the death of one joint owner, the asset passes automatically to the surviving owner, bypassing the will and probate.

A lot of people think about making their homes or investment accounts joint with a family member to avoid probate fees, or for convenience to help manage the asset. Though generally a good idea with a spouse, joint ownership with an adult child (or other family member) is a whole new ball game - one that could expose you to unintended risks.

Potential risks include:

• Tax consequences. When you make an asset joint with a child, you are effectively disposing of half the asset and gifting it to the child. This could trigger immediate capital gains tax for you if the asset has appreciated, plus tax consequences for your child on future capital gains or other income earned from the asset. Even a jointly owned home could be partially subject to capital gains tax when the house is sold, since it may not be the child's principal residence. What's more, you would need your child's consent to sell or mortgage any jointly owned real property.
• Creditor claims. Once an asset is registered in joint ownership, your child's creditors could make a claim on his or her share of the asset. This includes creditors of a failed business or a failed marriage. Such a claim could even force the sale of the asset.
• Confusion for heirs. Do you have other children? Upon your death, your heirs may disagree about your original intentions in making the asset joint. Were you making a special gift to one particular child, or was the child really a "trustee" expected to share it with your other children. Lack of clarity here could create a legal nightmare.

Before you act, we recommend you consider other options for meeting your objectives, including use of powers of attorney and trusts - or at least that you take steps to legally document your intentions. We would be happy to sit down with you to discuss potential strategies and refer you to a legal specialist if needed.