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Path 3: Hold Your Assets in Joint Ownership

Posted by Scott Schenking | Aug 17, 2021 | 0 Comments

Path #3 - Holds Your Assets in Joint Ownership

What control do you have? Answer: Limited control, in that all the joint owners must agree on any sale, refinance, lease, or other disposition of the property.

What fees, costs and commissions have you saved? Answer: None. On the death of the surviving joint owner there will be a probate of the property.

Next To Gifting, Joint Ownership Will Lose Control Over Your Assets

Jointly owned property passes BY OPERATION OF LAW to the surviving joint owner(s). Jointly owned property does not avoid probate. There will be a probate on the death of the surviving joint owner. As between a husband and a wife, jointly owned property receives only ½ the available step up in basis on the death of a joint owner.

Before 1977 the basis rules were different. Still today, for property acquired before 1977, the full value of joint ownership property is included in the value of the estate of the first owner to die and the surviving spouse receives a full step up in basis for the whole property (this property acquired prior to 1977 rule applies to all joint tenants and not just married couples).

For joint tenancy property acquired after 1977, the IRS reasons that the surviving joint tenant should receive a step up in basis only to the extent the property was included in the deceased joint tenant's estate for federal tax purposes.

Examples:

And thus for jointly held property acquired after 1977, on the death of the joint owner, the surviving joint tenant gets a step up in basis only for ½ the value of the property -the ½ owned by the deceased owner (IRC 1014(b)((9)).

Assume we are dealing with a married couple who live in a separate property state such as Florida, with jointly held property, all acquired after 1977. Let's consider the loss of ½ the available stepped-up basis, and the capital gain tax consequences. Assume the husband dies first. Assume an estate worth $4,000,000 with mutual funds purchased for $100,000 that are now worth $600,000.

If the mutual funds are owned jointly, then on the death of the husband, the wife takes the mutual funds with a basis of $350,000 (i.e. ½ the stepped up basis). Capital gain taxes (or perhaps ordinary income taxes) will be due on the $250,000 taxable gain if she sells them (15% of $250,000 or 20% for high income earners).

If the mutual funds would have been owned solely by the husband, or if they were transferred to a Revocable Living Trust and retained therein as separate property, or if they were property owned as tenants in common, or as property subject to an exercised reciprocal power of appointment, then on the death of the husband, the wife will take the mutual funds with a full step up in basis of $600,000. No taxes will be due if she sells them.

Also consider that:

  • Jointly owned property is subject to the debts and liabilities of any one or all of the joint owners (i.e. the bankruptcy of one joint owner could wipe out the joint ownership interest of the other joint owners).
  • A joint owner, acting on his own, could, (theoretically), encumber jointly held property.
  • Jointly held property gives no creditor or legal protection to any of the joint owners. Just the opposite is true. The credit or legal problems of one joint owner can lose the jointly owned property for all the joint owners.
  • Couples living in a community property state may own property jointly that is located either in the community property state or in a separate property state. Married couples living in a state that authorizes tenancies by the entirety, may own their property as joint tenants.
  • Property owned in joint tenancy can defeat any attempt to do disability (i.e. Medicaid) planning for the non-institutionalized spouse.
  • Jointly held property is so often directed in a will or in a Revocable Living Trust to go to someone other than the joint tenant, and because of this, defective titles, contested probates, and unintended heirs are the inevitable consequences.

Remember, the title to jointly held property passes on the death of a joint tenant to the surviving joint tenant(s) by operation of law, and nothing that a will says or that a Revocable Living Trust says can change that fact.

So the bottom line here is that owning property jointly 1) will not avoid probate, 2) between the joint owners it could forfeit all or part of an available estate tax exemption, and, 3) next to gifting property away, it is the next best way to losing control.

About the Author

Scott Schenking

Scott is approved as a Certified Estate Planner by the National Institute for Certified Estate Planners. Scott received his Juris Doctor from the nationally ranked George Mason University Antonin Scalia School of Law in Arlington, Virginia.  Before beginning his own pra...

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