Joint Tenancy, Taxes, and Worse

What is Joint Tenancy?  

Joint tenancy is the most common property title with more than one owner. It is a legal title with the “right of survivorship,” meaning that when one joint tenant dies, the surviving titleholders assume ownership.

It sounds convenient. However, in every form of joint tenancy, there are many risks. 

It is effortless to add someone’s name to a title, whether it be real estate by quitclaim deed or by adding someone to your bank or another financial account.

Adding a Child to Joint Tenancy Title 

Most people understand a jointly held title passes to the surviving title holder(s), as stated above. It is the most common way to hold title to marital real estate. However, as covered below, it is far from the best way to hold a title when married.

However, since it is common, parents often choose to add their children to the title. They figure that when they both die, the title will pass directly to the child named on the title. Here is a list of what can and often does go wrong with that approach:

• If your child did not contribute capital in return for being added to the title, then, if it is one child, you gave that child a gift of 1/3 the value of your property. If the child survives both parents, they will own 50% upon the death of the first parent and 100% upon the surviving parent’s death.
• While the above appeared to work, the surviving child is subject to capital gains tax of 15 to 20% of the entire property appreciation from your original purchase price. Your child did not inherit your homestead exemption.  
• If you had more than one child and intended for your title-holding child to share the property equally with all your children, it might not happen. Your child could die before doing so, have pending litigation or creditors, or the child’s spouse might have a different idea. In addition, there are potential gift taxes of 18 to 40% on any gifted amount over $16,000 in a calendar year.
• When you added your child to the title, you subjected your property to that child’s lawsuits and creditor claims.
• If you add two or more children to the title, you own less than your children when your spouse dies, and they might decide it’s in your best interest to sell your house.

Avoiding Probate with Joint Tenancy

Married couples often believe that joint tenancy avoids Probate. It doesn’t. It delays Probate until the death of the survivor. 

Probate exists primarily because no one has the right to sign our name. If you become incapacitated, or when we die, property held solely in our name must go through the long (1-2 years) and expensive Probate process. As a result, Probate must occur even if you have a Will. A Will is your written wishes that require Probate Court approval and the appointment of an Executor to oversee the distribution of your property.  

To avoid Probate, potential taxes, and other costly unintended consequences, you should hold title to all your property in a Living Trust instead of in your name.  

Advantages of a Living Trust

• A Will requires probate. The rule is no one can legally sign your name. Therefore, all assets in your name are subject to the Probate process, which averages 18 months and is costly.
• A Living Trust avoids Probate.
• Your financial accounts, life insurance policies, and deferred compensation accounts can name your Living Trust as beneficiary, subject to essential tax considerations.
• A Living Trust estate plan includes Health Care and Financial Power of Attorney documents. It also consists of a Last Will and Testament.
• A Will is necessary for guardianship of minor children. It also transfers assets in your name out of Probate.
• A Living Trust contains a No Contest provision and beneficiary Asset Protection clauses.

If you have any questions about Joint Tenancy, Living Trusts, or other areas of concern, please contact us today for further information or visit Tuohy Law Offices now.

Tom Tuohy is the founder of Tuohy Law Offices.

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TomTuohy.com
312-559-8400
17W220 22nd Street  
Oakbrook Terrace, Illinois, 60181

This blog entry is for information purposes only. Therefore, it is not legal advice. Please do not use this blog as legal advice, which turns on specific facts and laws in particular jurisdictions. No reader of this blog should act or refrain from acting based on any information included in or accessible through this blog without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the reader’s state, country, or other applicable licensing jurisdiction.