A very common way to hold title to an asset between spouses and non-spouses is by way of joint tenancy. However, after reading the following dangers outlined below, you will want to see an estate planning attorney to review your estate plan to avoid these pitfalls.
Danger #1: Only delays probate. When either joint tenant dies, the survivor — usually a spouse or child — immediately becomes the owner of the entire property. But when the survivor dies, the property still must go through probate. So joint tenancy doesn’t avoid probate; it simply delays it.
Danger #2: Probate when both owners die together. If both owners die at the same time, such as in a car accident, the property must still go through probate.
Danger #3: Unintentional disinheriting. When blended families are involved, with children from previous marriages, here’s what often happens: the husband dies and the wife becomes the owner of the property. When the wife dies, the property goes to her children, leaving nothing for the husband’s children.
Danger #4: Gift taxes. When you place a non-spouse on your property as a joint tenant, you make an immediate gift of one-half the value of the property. For example, when a mother re-titles her $80,000 home in joint tenancy with her son, she has just given her son a $40,000 gift. The mother is liable for gift taxes and the filing of a gift tax return. Fortunately, she does not have to pay the taxes until she has used up the Unified Federal Credit.
Danger #5: Loss of income tax benefits. If a person inherits a home through a will or living trust, the heir can sell the property without paying any income tax. But when a property has been held in joint tenancy, the surviving owner must pay income tax on the amount of his capital gain. This is called a step up in basis.
Danger #6: Right to sell or encumber. Joint tenancy subjects the property to each owner’s financial dealings. Either joint tenant has the right to mortgage or sell his half interest.
Danger #7: Financial problems. If either owner fails to pay income taxes, the IRS can place a tax lien on the property. If either owner files for bankruptcy, the trustee can sell that person’s interest in the home.
Danger #8: Court judgments. If either party has a judgment entered against him, such as from a car accident or business dealings, the holder of the judgment can and will execute the judgment against the home.
Danger #9: Incapacity. If either joint owner becomes physically or mentally incapacitated and can no longer sign his name, the probate court must give its approval before any jointly owned property can be sold or refinanced — even if the co-owner is the spouse.
If you own any assets as joint tenancy, it’s critical that you meet with an estate planning attorney to review your option(s) in order to avoid these dangers. Don’t put this important review at the bottom of your “to-do-list!” Our experienced estate planning attorneys are ready to assist you and will conduct a complimentary estate plan review.
About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years. Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects. We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead. Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe. Contact us today at 888.222.1328 to schedule an appointment!
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.