Don’t Count On Joint Ownership In Estate Planning

(Originally published in The Business Journal)

Probate is the procedure for transferring property at death through the probate court, and many people to try avoid probate.

A common strategy to do so is to put property in two names – an individual’s own name and that of the person they want to receive the property at their death. This “joint property” or “joint tenancy” or “joint tenancy with right of survivorship” does avoid probate and may work well at death also. 

However, most people should avoid using joint property as a substitute for a will, unless they get professional advice first.  The reason is that joint ownership very often causes problems.

Joint property often causes litigation after death. It may result in unequal treatment of children. Joint property can also:

• Lead to inequitable results in the event of an unexpected order of death.
• Cause unexpected gift tax problems.
• Tie up real estate.
• Open up property to attachment by your joint tenant’s creditors.
  • Subject children who get real estate through joint tenancy to their parent’s tax basis, not the stepped-up tax basis they would normally have. When they sell the real estate after the parent’s death, this may cause a huge, unnecessary income tax on the capital gain.

Let’s look at an example. Say Mollie has a house worth $250,000, which she and her husband (now deceased) purchased 40 years ago for $30,000. 

Mollie decides to put her daughter, Dottie, on the title as joint owner so that probate is avoided, and Dottie gets the house when Mollie dies.

At the time she added Dottie’s name to the title, Dottie became a 50 percent owner of the house.  For gift tax purposes, Mollie made a $125,000 gift to Dottie at that time, and needs to file a gift tax return and possibly pay a significant gift tax.

After Mollie dies and Dottie sells the house (say for $250,000), another big tax problem emerges.  Because Dottie got the house by gift, she gets “pass through” tax basis.  In other words, Dottie gets Mollie’s original tax basis of $30,000.  This means Dottie owes income tax on a capital gain of $220,000, the difference between the sale price and her basis.

On the other hand, if Dottie had inherited the property from her mother, then she would have received a “step up” in basis to the $250,000 fair market value of the property at the time of her mother’s death.  This means there would have been no gain and therefore zero income tax on the sale. 

In this case, joint tenancy was an awfully high price for avoiding probate.

Another example will show one way unfair treatment of children can occur.  Assume Sam is a widower with two adult children, Tom and Sallie.

Sallie is unmarried and lives with Sam in his paid-for $200,000 home.  Tom is married, has three children and lives five miles from Tom in his own home.

Sam wants Sallie to get his home when he dies, but wants to treat his two children equally.  In addition to his home, he has $400,000 of other assets.  Sam has a simple will leaving everything to Sallie and Tom equally.

To accomplish these goals, Sam puts Sallie on the title to his house as joint owner.  He also puts Tom on a $200,000 bank account as joint owner, to counter balance Sallie getting the home.

Sometime later, Tom dies in a car wreck.  Two weeks after that, Sam dies from a stroke.

Because Tom died first, Sam was the sole owner of the $200,000 joint bank account when he died, which then passed to Sam’s estate along with the other $200,000 of assets. Because she was the sole surviving joint tenant of the house upon the death of Sam, Sallie got the house free and clear.  Sallie is also entitled to half of Sam’s $400,000 probate estate.

The unfair result is that Sallie receives $400,000 worth of property when Sam dies, but Tom’s kids share is only $200,000.  Proper estate planning would have made this inequity impossible.

Probate can be avoided and all of these problems can be solved using a trust agreement or several other common estate planning techniques. Estate planning attorneys have many arrows in their quivers. 

So don’t rely on joint tenancy. Get competent advice.

Beard can be reached at rbeard@hhmlaw.com or at (330) 744-1111