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3 Risks to Owning Property With Family Members

Owning property with family members seems like a good idea on the surface. You probably are going to pass the asset on to the same people anyway. So why not avoid probate by ensuring that ownership is handled before you die?

There are a few reasons to avoid this. First, you run the risk of saddling family with the gift of higher estate or income taxes. Second, you expose the property to more creditor claims. Third, you lose control of the asset. However, as explained below, there are alternative methods of managing your estate that achieve the same goals as joint ownership -- but with fewer risks.

The Risks Explained

1. Taxes: When you deed a portion of your property to someone other than a spouse, you are making a gift. That may trigger gift or estate taxes, depending on the value of the property and where it is located. Similarly, joint ownership means higher income taxes upon your demise as the portion of the property you gave will not be subject to the capital gains exception for inheritance when the family sells the property. In other words, it will cost your family more to sell a jointly-owned house than an inherited one.

Saddling your family with financial obligations they may not be able to handle is probably not the gift you were looking to give. But there are ways to accomplish the goal of passing on the property, avoiding probate, and minimizing taxes.

2. Creditor Claims Exposure: The more people own a property, the more creditors can claim it. Say, you give half of your home to your married son and he later divorces. The half of your home that he owns is now an asset subject to division with his soon-to-be-ex-wife. If you want to pass property on to your family to ensure stability for heirs, make sure you take steps to safeguard the estate.

3. Loss of Control: You love your family but can you trust them? Pass on part of your property to another family member and you lose control over part of your asset. What if your kid gets in a pickle and transfers ownership without your knowledge? What if you want to sell the property while you are still living? Now you need the co-owner's cooperation. There are other risks depending on the specifics of your situation. And there is an alternative.

The Living Trust Alternative

To avoid some of the risks inherent in joint ownership, consider a living trust instead. Joint ownership can backfire. A living trust is a revocable trust set up during your life. You retain control over the trust, adding and removing assets as you wish. When you die, the assets in the trust are distributed by the named trustee (often a spouse) to the named beneficiaries. A living trust is easy to set up, maintain, and change. It can protect dependents with special needs and help you to wisely share what is yours.

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