Joint Tenancy / Joint Ownership
Probate is the legal process that resolves the question
of ownership. People are often told to avoid probate by owning assets
are "joint tenants".
Indeed, jointly owning property can prevent probate.
If two people have a joint bank account, then the other can still get
the money out if one dies. With jointly owned real estate, you can easily
get the other person's name taken off the property with a death certificate.
But joint ownership is not a very good solution
in most cases. Here is why:
Legal and Tax Liability
Putting additional names on a title (especially
names in addition to a husband and a wife) can open up the property
to all kinds of legal and tax trouble. You see, jointly owned property
is usually considered to be 100% owned by both parties. So putting your
kids' names on your house might seem like a good idea at first in order
to avoid probate, until little Johnny has the IRS breathing down his
neck for not paying some old taxes, or when Johnny's little business
fails and his creditors come knocking, or until Johnny gets sued for
hurting somebody and the plaintiffs come looking for all of Johnny's
assets. Your house is one of his assets. His name is right there on
Gift Tax Problems
Besides all the risks, simply putting your
child's name on a piece of real estate may trigger very large
gift taxes. Simply adding Johnny's name to the title of your house (with
say $150,000 equity) just made him a 50% owner for gift tax purposes.
On paper, you have given him $75,000 and you are subject to a large
gift tax liability.
Loss of Stepup in Basis
It is an income tax disaster when you "inherit"
property via joint ownership.
If the property comes by joint ownership,
it does not get a step-up in basis. When you sell the property, you
pay income tax on all of the profit. This can cost a lot in income taxes.
Say your mother has a house
now worth $150,000. She has had it for the last 20 years since your
dad passed away (when they only paid $40,000 for it). Someone convinces
her to put your name on the title so you can avoid probate when she
dies. Without going into the gift tax problem, let's just say that you
are now on the title as a joint owner.
When she dies, you become
the sole owner of the property, and you wish to sell it immediately.
When you sell the property for $150,000, you are now liable for income
taxes of the difference of the selling price ($150,000) and the original
basis ($40,000). You now owe income tax on an extra $110,000 this year!
Say goodbye to about $25,000 of your money.
If you receive property because of a death
through inheritance (inherit by will, probate, or trust), in the IRS's
eyes, the property's value is "stepped up" to its fair market
value on the death of the owner. If you inherit property and immediately
sell the property, there would be no profit and thus no taxes.
Now let's say you inherited
the same property from dear old mom. Since her estate was pretty much
just the $150,000 house, there were no estate taxes due when she died.
Now if you sell the property
immediately, the property has a new 'stepped-up' basis of $150,000.
When you sell the property for the $150,000 that it is worth, you have
no income tax liability.
Quite a difference! Don't fall for the Joint
The Bottom Line is:
* Keep your kids names off of your property!
* And keep your name off of your parent's property!
There are much better ways to avoid probate
than joint tenancy.
More Information on Correct Estate Planning Tools
||FREE DVD on Joint Tenancy Pitfalls
Click here for a Free DVD
This DVD is your guide to understanding estate planning, including the proper way to title
your property for estate planning and asset protection.
Lee's ebook, Protecting
Your Financial Future, gives you all the basic information of estate
planning, including important information on avoiding probate and property
For establishing your own proper estate plan, the
Estate Planning System (Accumulation and Preservation
of Wealth) gives you all the knowledge and proper legal documents
to properly set up, fund, and maintain your own Revocable Living
Trust and other "tools of wealth".
With the Accumulation
and Preservation of Wealth System you'll save thousands of dollars
in attorney's fees and end up with a better estate plan
than over 99% of other people in the country.