Trying to save your beneﬁciaries from the time and expense of probate by adding one or more of them on the title of your property as a “joint tenant” is a dangerous thing. It is true that by adding someone as a joint tenant on your property, your property will not have to go through probate when you pass away. However, as an unintended consequence you are also giving that person an immediate ownership interest in your property. That means that the person you made part owner of your property and that person’s creditors can make claims on your property. In this article I would like to point out another major disadvantage of adding someone to your property as a joint tenant: increased income tax liability when the property is sold.
Under IRS rules, when someone inherits your property, their tax “basis” in the property is the value of the property on the date of your death. To illustrate, let’s imagine that you paid $100,000 for your home 20 years ago. Further imagine that on your death your daughter inherits your house, now valued at $500,000. If your daughter sells your house two years after you pass away when it is valued at $600,000, taxes would be due only on the $100,000 difference in value between the date of your death and the date of the sale. On the other hand, the result would be very different if you have made your daughter a joint tenant on your property. Under IRS rules, your daughter can only get the date of death value on your half of the property. Therefore, when she sells the property for $600,000 she pays taxes on $300,000 ($50,000 on your half and $250,000 on her half)!
Fully explaining this tax issue is a job better left to an accountant or CPA; however, for estate planning purposes it is enough to know that adding someone as a joint tenant could have costly tax consequences for them down the road. A living trust can help avoid the payment of excess income taxes on transferred property. If your daughter had inherited your property through your living trust, you could have achieved your goal of transferring your property quickly and in a cost-effective manner. In the above example, your daughter would only have to pay taxes on the $100,000 gain between the date of your passing and the date of the sale. Finally, as pointed out previously, you could maintain full control of your property during your lifetime. Therefore, before you give someone a present interest in your property through joint tenancy, you should seriously consider the advantages of a living trust.
(© 2018 by Marlene S. Cooper. All rights reserved. Marlene S. Cooper, a graduate of UCLA, has been an attorney for over 35 years. Her practice is focused entirely on estate planning, estate administration and probate. You may obtain further information at www. marlenecooperlaw.com, by e-mail at Marlene@MarleneCooperLaw.com, by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is of a general nature and not intended as legal advice. Seek the advice of an attorney before acting or relying upon any information in this article).