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Co-Ownership Planning: Does It Offer Asset Protection?

— May 24, 2019

There are some myths regarding asset protection. Co-ownership planning is one of them. It’s always best to consult an estate planner before potentially putting your assets at risk.

Estate planning professionals naturally field many questions about how clients can best protect their assets. Strategies for asset protection are wide-ranging, and estate planners must work in their clients’ best interests to determine which strategies should be used when. An unexpected obstacle many planners encounter is persuading old or potential clients that the asset-protection strategies they’ve heard from friends or read about online aren’t always smart. Co-ownership planning is an excellent example of a fallacious protection strategy. 

What is Co-Ownership Planning?

Co-ownership planning is a strategy that claims that assets which are owned by more than one person are safer than assets owned by a single party. This type of planning is sometimes employed by married couples who enter a relationship holding significant individual assets. Older individuals who are concerned about the security of their assets also tend to pursue co-ownership with one or more of their grown children. Couples or groups using this supposed method of asset protection add additional individuals as owners on a variety of assets including bank accounts, real property titles and car titles. 

Can Co-Ownership Planning Protect Assets?

The idea behind co-ownership planning is that a creditor or other interested party won’t be able to access assets because they are owned by more than one person. The theory goes that creditors or relatives won’t get such assets because only one party on the account or title is liable to pay, and the other account holders can’t be punished for that debt. This belief simply isn’t true. A creditor may be able to attach all or part of an account or asset even if someone other than the liable party is listed on the account. Co-ownership generally offers little-to-no protection from creditors.

Two men shaking hands; image by Cytonn Photography, via
Two men shaking hands; image by Cytonn Photography, via

Many financial planners have also recognized that group co-ownership of assets actually increases the risk of the asset’s value decreasing. Imagine that a group of five friends invests in a rental property. One of the friends encounters financial trouble and falls behind on a personal loan. If the creditor can secure a court judgment that allows for the seizure of assets, the rental property that the group owns together is at risk. The more individuals who co-own an asset, the more likely that a creditor will eventually come calling. This group of friends likely would have done better setting up a limited liability corporation (LLC) or a Limited Partnership (LP) to purchase rental property. 

Co-ownership planning can also have negative implications if one of the account owners passes away. This happens most frequently with older individuals who have multiple children. The account owner has named one child as a joint owner on the account. When that person dies, the joint owner automatically becomes the sole owner of the account. That means that other children and relatives will be left without anything unless they can prove in court that the deceased person wished for those assets to be divided otherwise. A living trust is generally a much better option for aging individuals who want to protect assets and ensure that they end up in the right hands. 

It’s important to note that married couples often do hold important assets together, such as joint bank accounts or real property titles. These forms of joint ownership are generally low-risk unless one of the partners has been married before or the estate is very large and other tax considerations come into play. Of course, co-ownership can also become a serious issue during a divorce. It’s essential that financial planners counsel clients regarding the potential pitfalls of joint marital assets.

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