The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.
QUESTION: I want to avoid probate upon my death. I’ve heard that I can avoid probate by putting my adult children on the title to my house as joint tenants. Is that a good idea?
Maybe, maybe not. You must understand that joint tenancy means more than just a way to avoid probate in the event of your death. Co-owning assets with your children as joint tenants also has an effect while you’re alive.
Risky business with joint tenancy
If your children become joint tenants with you, they are co-owners of your house while you are alive. Putting aside some of the technical gift tax, income tax, property tax and death tax issues, let’s just talk about the financial risk you are taking when you hold title as joint tenants with your children.
If one of your children has a business that goes under, your child’s creditors may go after your child’s portion of the house while you are alive. If one of your children is at fault in a car accident where your child’s car insurance is not enough to cover the damage, the injured party may go after your child’s portion of the house while you are alive. And how would you feel if you had a big fight with a child and your child decided to sell his or her share of the house you’re living in? Why take these risks?
The bottom line is that while a technique such as joint tenancy may be good for one purpose (e.g., avoiding probate), it can have other unintended effects that could be a disaster.
Also, if you hold title (ownership) to an asset (such as a house) with your children as joint tenants and you and your children pass away simultaneously (e.g., in a car accident or a plane crash), the house may go through several probates, yours and your children’s. So, joint tenancy may not even avoid probate.
If you have minor children, all of the above applies and even more so as there are additional complications and issues.
(In this book, I am using the short-hand phrase joint tenancy to refer to joint tenancy with right of survivorship [also known as JTWROS] where the surviving joint tenant(s) become(s) the sole owner(s) after another joint tenant passes away.)
A living trust is less risky
To avoid probate and being responsible for your adult children’s debts and actions, get advice on setting up a living trust instead.
Although living trusts are more fully described later, for right now you just need to know that a living trust keeps you in control while you’re alive, acts as a type of will substitute when you die and allows your successors to avoid the probate court after your death.
HINT: If your goal is to avoid probate upon your death, look into setting up a living trust instead of holding title as joint tenants with your adult or minor children. That way you’ll be able to sleep at night and not be your children’s keeper for the rest of your life.
Beneficiary deeds
There may also be another alternative to joint tenancy or a living trust available to you to avoid probate on your house.
In some states, an inexpensive beneficiary deed can be used to keep title and control in your name during your lifetime and also avoid probate upon your death. Note that your ability to name contingent beneficiaries may be limited with a beneficiary deed.
Also, since a living trust has other benefits besides avoiding probate on real estate (and other assets) and is usually an easy way to do death tax planning, get advice on the best approach for your particular situation.
You may actually be HURTING rather than helping by commencing j/t while you are alive. Especially if you will be under the estate tax limit. Because if you gift the house in any way to children while you are alive, they inherit a stepped up tax basis, meaning that when they sell, there will be capital gains based on the date they acquired the property from you. However, if you die, there is no stepped up basis, so your children do not have to pay ANY capital gains.
Posted by: Laurie | May 05, 2008 at 06:10 PM