Index page

Joint Tenancy Example

Posted on: March 24, 2017 at 4:09 am, in

I have a Joint Tenancy scenario to share to better explain the technicalities as well as the pros and cons of using this method of planning…
Mary had paid off her mortgage 10 years ago and owned her home free and clear. She had a total estate (total assets minus total debt) valued at far less than $500,000. In fact, her home was her only major asset other than a savings account with less than $7,000 in it.
Mary didn’t want her son Joe to have to hire an attorney and go through the hassle of probate when she died, and she didn’t think it was worth going to the expense or the trouble to create a trust for such a small estate.
So she decided to add her son, Joe, as a joint tenant – essentially making him an equal owner of her home.
Three months after the deed was changed by adding Joe as a joint tenant, Joe got into an accident and was sued. One month after the accident, his wife filed for a divorce. During the hearings for both the accident and the divorce, the courts uncovered that he co–owned his mother’s home.
To make a long story short, within the year the courts forced Mary to sell her home to cover Joe’s debt from the accident and Joe’s wife in the divorce settlement. Mary moved into an assisted living facility and lost what little she owned.
This is the kind of horror story that happens far too often when people try to take shortcuts with will substitutes and other methods of sharing property outside a proper estate plan. Nobody expects to get divorced and certainly nobody expects an accident to occur either.
Having assets in joint tenancy can be an enormous problem, and it’s not something most estate planning professionals recommend. In this article you’ll learn why that is the case and what to do if you have property in joint tenancy.
A lot of people inquire about “will substitutes”–which are alternative options for estate planning, like “joint tenancy”, as a method to avoid probate.
Joint tenancy means exactly what it says–two or more people own a specific piece of property jointly. When it comes to estate planning, many people think about using joint tenancy as away to pass their assets to their heirs without going through probate.
How can you do this?
Well, it’s fairly simple. When one “tenant” dies, the property automatically transfers to the owners who remain alive.
Unfortunately, it doesn’t always work out so easily.
In an attempt to avoid probate, many well–intentioned elderly parents add their children to the titles of their homes as joint tenants. In some cases, I am sure the plan works without major problem.
However, there is a question you need to ask yourself…
Is this worth doing when the possibility exists that the property may have to be sold prematurely–perhaps even before the parents die?
Mary story is a perfect example of what I’m talking about.
And if you think that story sounds far–fetched to you, it happens more than you might think. We literally get at least one phone call a month of people trying to undo their mistake after something bad has happened.
That alone puts a big question mark on the whole concept of joint tenancy.
But there’s more…

Second Problem with Joint Tenancy

The second problem with joint tenancy involves nursing home or Medicaid planning.
If Mary ever needs 24 hour care because she can no longer live by herself, Medicaid will require her to spend everything she has (until she has less than $2000) before Medicaid helps to pay for care. With her home, she may qualify for Medicaid but they will put a lien on her home for every dollar Medicaid pays for her care.
Most 24 hour care facilities and nursing homes cost $8–12,000 per month. That means that her $350,000 home will evaporate in less than 3 years! (Math $350,000 / 10,000 per month)

Third Problem with Joint Tenancy

The third problem with joint tenancy revolves around capital gains taxes.
When someone dies, the cost basis of their assets is “stepped up” to the current market value. For example, let’s imagine that Mary originally purchased her house for $100,000. When she dies it’s worth $350,000. The cost basis in the house will be “stepped up” upon death–that means the house will be valued at $350,000.
When you sell an asset, you are taxed on the difference between your cost basis in the asset and the price you sell it for. If Mary passes her house to Joe after she dies, he will have a cost basis of $350,000, or the current market value, so if he sells it at that price, he pays no taxes.
But if Mary adds Joe as a joint tenant when the house is worth $100,000, he will have a cost basis in the property of $50,000, or half the total value of the home when it was purchased.
When he goes to sell it for $350,000 after his mother passes away, he will be taxed on the gain. If the capital tax rate is 20%, you just cost your son $25,000!
(Math explained: $350,000 / 2 = 175,000, 175,000 – 50,000 x 20%)
So by trying to save $5–10,000 to do the right planning, you caused a $25,000 expense!!!
So, what do you think of joint tenancy now?
It’s not a cure–all by any means, and I’ve never met an estate planning attorney who likes it too much, so it’s important for you to be aware of the issues.
Now the natural next question is, “What should I do if I currently have property in joint tenancy?”
The answer, of course, depends on your particular situation and we commonly help people understand options so they can make an informed decision.
So, if you have property in joint tenancy, please give me a call today at (888) 938–5872.