4 Ways to Pass Property at Death (part 3)

Welcome Back

Welcome back, I’m Greg Ashcraft, with The Ashcraft Firm and I am an estate planning attorney.

Last Time…

Over the last couple of weeks, we have talked about two of the ways that you can pass property at the time of death, and this week we will talk about the third way to pass property at the time of death. In week one, we talked about passing property through your estate and we talked about the pros and cons of passing property that way. In week two we talked about passing property by contract and the pros and cons of passing property that way. This week we will talk about the pros and cons of passing property through joint Tenancy.

Passing Property By Joint Tenancy

What do we actually mean when we say we are passing property by joint tenancy. Usually, this phrase is used in deeds. “Joint Tenancy” is actually shorthand for “Joint Tenancy with right of survivorship.” This is the other way to hold property rather than Tenants in common. Either you hold property as tenants in common, joint tenants, or as your sole and separate property. If you are holding property with more than one person you have to hold property either in tenants in common or joint tenancy. If you are holding property as tenants in common, the property acts in much the same way as if you held the property as sole and separate property. Let’s say, for instance, that you hold your property with your spouse as tenants in common 50/50. This means that we each hold half of the property by ourselves. We can make agreements in which we give that property to someone else when we die. If I held my property as tenants in common with my spouse, I could give my property to my son upon my death if I wanted. When you hold property in joint tenancy with the right of survivorship, when you pass away it automatically goes to the other joint tenant.

Pros of Passing Property By Joint Tenancy

1. This is one of the pros of holding property as joint tenants: The transfer is automatic. So let’s say that I hold property with my spouse as joint tenants. When I pass, my spouse will become the sole owner of that property after she files an affidavit of death of joint tenant with the county recorder where our real property is located.
2. The second pro of holding property as joint tenants is that because the transfer is automatic, it avoids probate.

Cons of Passing Property By Joint Tenancy

There are lots of downsides to passing property in that manner.

1. First, we cannot name a contingent beneficiary without just adding more and more people to our deed. Let’s say that I want my children to receive the property if my spouse were to pass away before me. The only way to allow them to receive the property is to add them to my deed. Now we have all of the children on our deed too.
2. This leads to the next downside of holding property in joint tenancy: you no longer have control of your property during your lifetime. Now, when you want to sell your property, you have to get consent from all of your children to sell the property. You may not think this is much a concern while you are younger and your children don’t want to interfere in your life. However, as you age this may become more of a concern as your children start to think that they know better than you about what you should do with your life. By adding children onto your deed as joint tenants then, you lose a level of control.

NOTE: Joint tenancy doesn’t just apply to real property. You can hold your bank accounts, for instance, as joint tenants. Let’s say that you do put one of your children on as the joint holder of your bank account. If your child started a business and that business failed now your child’s creditors become your creditors because you hold a joint asset. You can lose control that way too.

1. Finally, one of the problems that come from holding assets jointly is that your family will end up paying lots of taxes. When you started holding property as joint tenants, you were trying to avoid the time and cost associated with probate. A lot of people just give away property while they are living to avoid the probate process too. The negative tax ramifications that I am about to discuss work against these people too. Both giving the property away entirely or giving a property interest to a loved one in the form of joint tenancy are seen as giving a lifetime gift in the eyes of the IRS. There are lots of taxes that will come due after your death. Let me demonstrate this.

Visual Demonstration of Tax Consequences

I’ve drawn up here the tax consequences of joint tenancy or giving the property away while they are living. A lot of people think that it is a good idea to simply give away property while they are living rather than let their loved ones go through the probate process, but there are major tax consequences to passing property in this manner.

Let’s say that you purchased a piece of real property in 1990 for $100,000. Basically, your tax basis in that property is $100,000. There are things that you can do to that property that will either increase or decrease the tax basis of that property, but for simplicity’s sake, we will pretend that none of that happened. Now, in the year 2017, when we are filming this, your property is worth $300,000. If you gift that property either entirely or by putting someone on your deed as a joint tenant, you give them the same tax basis that you had in the property. The IRS will treat that $200,0000 increase in value on the property as if it is increase to your loved one. They will get capital gains taxes when they sell that property. It used to be that long-term capital gains tax was a straight 15% across the board. Today, however, federal capital gains tax is between 15-23.8%. Add to that the 9% charged by the state of California and you are talking about at least a quarter of the increase in value going to taxes. In this example that is $50,000 plus.

Now let’s look at this example below. Let’s say that instead of giving away the property while you were living, you passed that property through a will or trust, your loved one will now get what they call a “step-up” in the basis to the time of death. Now, when you pass away your loved one can sell that property the next day and will not pay anything in taxes. You just saved your loved one at least $50,000.

Now, we talked about how a will still has to go through the probate process. Next week we will be talking about a trust and how that can avoid probate and the negative tax ramifications I just described.

Recap

To recap, the pros of passing property by joint tenancy are:

1. The transfer is automatic, so it
2. Avoids probate

but the downside is that you

1. cannot name contingent beneficiaries
2. you lose control over the property during your lifetime and
3. your loved ones will pay LOTS OF TAXES

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Nothing said in this post should be misconstrued as legal advice. The information is situational. You should seek legal counsel as to whether the strategies and consequences apply in your situation. Also, the very basic information given here is based on California law and may not apply in other states.