Some Pit-Falls regarding Joint Tenancy
It is not uncommon for me when I meet with clients that the discussion about Joint Tenancy comes up as a less expensive alternative to creating an Estate Plan in the form of a Living Trust or a Testamentary Will.
When one Joint Tenant dies, his or her interest in the asset held in Joint Tenancy passes IMMEDIATELY to the surviving Joint Tenant(s) without probate, even if the deceased Joint Tenant has left a Will passing the property to another person!
I have spoken on numerous occasions about some of the different scenarios regarding Joint Tenancy and the dangers regarding this strategy. Please note the following:
Joint Tenancy Does NOT Avoid Probate Upon Death of Both Joint Tenants
Here is the situation. Suppose a husband and wife purchase a home here in California and they choose to have the title to the property vested as, “Husband and Wife as Community Property with Right of Survivorship or Husband and Wife as Joint Tenants.”
The vesting or how to hold title to the real estate is done or rather chosen when you sign a note and deed of trust, securing the loan to the property, when you sign your papers at the title company.
In effect, when the first spouse passes away, the decedents’ equal share of the property immediately vests with the survivor. No probate, no problem, right???
However, what happens when the surviving spouse later passes away? If there is no estate plan in place, the property will have to pass through probate and title will eventually pass to the heirs of the surviving spouse.
Potential Disinheritance
Let’s assume the same set of facts as above. In this scenario, the mother passes away. Dad holds title to the property as his sole property also leaving him with three children. Dad then gets remarried and places his current wife, who has two children of her own from a previous marriage, on title as a joint tenant. Dad later passes away.
What has happened here? Dad’s second wife now owns 100% of the property and she is free to give it to her two children when she passes away, thereby disinheriting dads’ three children.
Exposure of Your Assets to Claims by Creditors of Your Joint Owner
I have been asked by clients/parents about placing their adult children on title to their home(s)/property, for the purpose of passing their property to their children upon their deaths. Sounds great, doesn’t it???
There are a host of potential problems with this scenario.
What happens when one of your children are involved in civil litigation and end up being held liable? In this case a judgement creditor may go after the property to help satisfy the judgement against your child/children.
What about tax liability to the IRS, State Franchise Tax Board or any other taxing entity? Yes, the asset is exposed to attachment.
What if one of your children files for Bankruptcy protection? The property will probably become a part of the Bankruptcy Estate of the Debtor, a/k/a, your child.
What about one of your adult children placing their spouse on title with respect to this child’s percentage ownership in the property (Remember, Joint Tenancy shares are always equal between the joint tenants) Unless drafted correctly, this may and probably will have the effect of severing the joint tenancy between the record owners of the property, thereby everyone holding title as a tenant in common, this means no right of survivorship and probate of the percentage interest of that of all who hold title upon their death)s)
Taxes
Estate Tax:
No Estate Tax here in California, at least, not yet. However, there is a Federal Estate Tax. The amount of the estate tax is calculated by multiplying the value of the estate over the Federal exemption amount. (Exemption amount for 2020 is $11,580,000.00/single; $23,160,000.00/married)
Joint tenancy property passes automatically to the surviving co-owner, it never forms part of the deceased person’s estate, and is not included in the estate valuation on the death of the first co-owner. However, what happens at the second death? The whole value of the property would be included.
Capital Gain:
If property is transferred to a child using joint tenancy, the child receives the percentage of the property transferred at the donors’ acquisition base. Later, if the child sells the asset, a portion of the property may be subject to capital gains tax. This would not happen if the property passed to the child/children by way of a Living Trust because the value for capital gains purposes, is calculated at the date of death. (We are assuming the primary residence for the decedents)
Property Tax:
Here in California, whenever title to real property changes, the property may be subject to reassessment for property tax purposes, unless there is an exception. Since the transfer of an ownership interest is a parent to child transfer, the transfer would be exempt under Proposition 58. Transference to a Living Trust of the property is also exempt under the Revenue and Taxation Code.
Transfer Taxes:
Transfer taxes are a little bit different. If, during the life of the parents, a portion of the property has been deeded in joint tenancy to a child or children, there may be a transfer tax imposed on the transfer unless the transfer is a gift (R&T Code 11911). These taxes vary from county to county. However, if the property passes from a living trust to the child or children, the transfer, because it’s an inheritance, is exempt from transfer tax under R&T Code 11930.
Gift Taxes:
If the transfer is a gift under R&T Code 11911, another problem may arise with our friends at the Internal Revenue Service. When a gifting to a child/children, the person(s), i.e. the parent(s), must file Form 709 with their 1040 Income Tax Return. This enables the parents(s) to give $15,000.00 per year or $30,000.00 per year if married to each child, grandchild, per year, tax free. This also keeps the IRS apprised of all gifts. Any amount over the 15K/30K amount is credited towards the lifetime exclusion regarding gifts. If you do not file form 709, the IRS may view this as tax evasion!!!
There may be other potential problems related to Joint Tenancy issues. The scenarios above are a few that I have run across and is not a complete list of potential problems related to Joint Tenancy. If any of these problems sound familiar, give me a call!!!