Estate Planning

A few weeks ago I wrote about ways to avoid probate, in that post I mentioned that property that is jointly owned passes outside of the probate process.  It sounds like a great way to pass your real estate to your children and save money in the process. 

Mina N. Sirkin wrote a great post over at her Law Firm Marketing & Management Systems blog covering this topic.  If you would like to read her post click here.  Basically it boils down to this; when you hold real estate in joint tenancy with someone their problems can become your problems. 

If your child has a judgment entered against them your real estate could have a lien placed on it to satisfy the judgment.  Satisfaction of that judgement could result in having to sell the home to cover the lien.  The other large problem is if you decide you want to sell your home you will need your child to consent to the home.  That issue can be compounded if the child is married, then you will need your child and your child’s spouse to agree to the sale. 

On top of the possible family strife involved the tax basis can also be an issue.  If mom and child hold real estate in a joint tenancy and mom passes away then the child will only receive a half step up in basis.  Here’s an example:  Say mom buys the property for $100,000 adds the child to the title as a joint tenant and when she passes away the fair market value of the property is $500,000.  Mom’s half of the real estate is transferred to the child and that half gets the step up in basis ($250,000) and now the child holds the real estate all by herself.  The child’s half still has the basis it started with, $50,000, and added to that is the half that got the step up in basis, $250,000, for a total basis of $300,000.  So now if the child sells the property for fair market value of $500,000 she would have a taxable gain of $200,000.  (Sale price $500,000 minus basis $300,000 = $200,000 taxable gain)

Contrast that with what would have happened had mom held the property all by herself and then the child inherited the property from mom after she passed.  The child would receive the property with a stepped up basis equal to fair market value, $500,000.  Now when she goes to sell the property she would not have any taxable gain.  (Sale price $500,000 minus basis of $500,000 = $0 taxable gain)

The moral of the story is that you should carefully consider the pros and cons of holding real estate in joint tenancy.  The legal and tax ramifications can be severe.  Proceed with caution!