The Dangers of Joint Tenancy
Most couples own their home together, jointly. Their home is either owned as Joint Tenants, Tenants in Common, Tenants in the Entirety, or as Community Property.
One of the benefits of owing it jointly is that when one of the owners passes away, the other one automatically becomes the sole owner, no probate, no delays.
This sounds alright at first until you consider what would happen if you were to die in an accident together, or what happens when the second spouse passes? The answer is the property must go through probate. *See my post on probate
Some people when they realize their property is still vulnerable to probate come up with a solution that creates more problems than it solves. After the first spouse dies, the surviving spouse adds one of their adult children to the deed so it would pass to that child instead of going to the probate courts. Sounds good???? Read on....this is often a terrible mistake.
There are 3 major problems with owning assets jointly with children. I advise my clients that it is almost always the wrong decision.
1. LIABILITY: When you put your son or daughter on your deed, they are not just joint tenants but you have now made them co-owners. If they get into an auto accident, get divorced, file for bankruptcy, get caught up in a lawsuit, then half of YOUR property is subject to THEIR liabilities. Should your son loses his home to foreclosure, he won't have a house, but you will... with a lean on it, because your co-owner stop paying his bills.
In short, their problems become your problems.
2. DISTRIBUTION: If you have 3 children and put your son on title, and you instruct him that after you die he is to sell the property and share it with his sisters..... Does he have to? The answer is NO. Your son now owns the property. I hate to tell you this but brothers cheat sisters and sisters cheat brothers. You have lost control of distribution. Some of you might say, "I don't have that problem because I have an only child and want everything to go to them and them only". Read on...
3. CAPITAL GAINS TAX: If you and your child own the property together, when you pass away they now own the house. When they go to sell that property they are subject to capital gains tax on any gain dating all the way back to your original purchase price. Imagine your house over the last two decades has increased in value $200,000.00. If the co-owner were taxed at just a 20% tax rate, they would owe the IRS $40,000.00 in capital gains tax.
THERE IS GOOD NEWS, HOWEVER. None of the above mentioned problems will happen if you pass your estate to your heirs through a Revocable Living Trust. When you distribute your estate through a Trust your children are not co-owners, they are beneficiaries.
Let me break out the benefits of a Living Trust verses Joint Tenancy:
The capital gains problem is resolved. As beneficiaries of your trust, all assets, including your house will go to your heirs at the current value. All property in the trust receives a STEPPED UP tax basis, so the IRS doesn't care what you paid for the property, it to will go to your heirs at the current value when you pass away. NO CAPITAL GAINS TAX DUE.
Distribution problem resolved. Your assets will go to the heirs listed in the trust. As the successor trustee of your trust, your son is legally obligated to follow your trust instructions and the other heirs do not have to "hope" he does what's right. The trust instructions are binding at your passing and he must carry out your wishes.
Liability problem resolved. Because your assets are not owned jointly with your children, their problems remain their problems. Your assets are not vulnerable to you children's potential divorces, bankruptcy, or other legal liabilities.
ANOTHER SERIOUS DANGER OF JOINT TENANCY:
If you are in a second marriage and have children from a previous relationship, when you die your jointly held property goes to your spouse. Does your current spouse have any legal obligation to give any of your estate to your children upon their death? or ever? The answer is NO, they has no obligation to do so. Very often the children of a parent in a second marriage are dis-inherited when their parent dies.
Should you pass away and the property becomes wholly owned by your current spouse and they remarry, your share of the property could end up with your spouse's next husband or wife or their children, NOT YOURS. WOW....imagine that.
If you have a Revocable Living Trust and you are in a second marriage, you can protect your half of the estate for YOUR children. The trust can make sure you don't unintentionally disinherit you children just because you were the first to die.
IN CONCLUSION: There may be other ways to pass your estate to your children to avoid probate other than a living trust, but there are so many problems that it may be worse than probate itself.
With a Revocable Living Trust you are telling your children, here it is... Come and get it. NO probate, NO capital gains tax, NO fighting, No delays, No hassles..... Enjoy!