Debits & Credits
by Douglas Schultz & Alexander Yarmolinsky
What is Joint Tenancy?
Joint tenancy is a way of holding title to property, with two or more people
equally sharing the ownership of the property. Each person, named as one
of the joint tenants, is considered to own an undivided interest in the property
held in joint tenancy. That is, each person owns the entire asset, not a
part of the asset.
An important feature of joint tenancy is the right of survivorship. This designation
means that if one of the co-owners dies, the interest of that person terminates,
and the surviving joint tenant(s) continue to own an undivided whole of the
property. This continues until the last remaining tenant becomes the sole owner.
Why
Do People Use Joint Tenancy?
Property is often held in joint tenancy because it is easy to set up, convenient,
inexpensive and can avoid probate and some of the difficulties of transferring
property upon the death of one of the owners. Property owned in joint tenancy
passes directly to the surviving joint tenant(s), without the requirement
to go through probate. The provisions of joint tenancy supersede any other
wishes that the owner may have outlined in his or her will or trust with
respect to that property.
However, many people utilize joint tenancy without fully understanding the nature or the consequences of doing so. Spouses and others should consider all the consequences associated with joint tenancy before placing any assets under this form of ownership.
Below, we will discuss the basic provisions of joint tenancy, including tax consequences (gift tax, estate tax and income tax), as well as some of the nontax considerations and misconceptions.
TAX IMPLICATIONS
Gift Tax Considerations when Owner is Added
When you place another person’s name on your property as
a joint tenant, you are in effect making a gift of half of your
property to that person. If you are not married to the joint
tenant, the value of one-half of the property placed into joint
tenancy is considered a taxable gift and may be subject to a gift
tax. Many people do not realize the potential gift tax implications
of adding a sibling or a child as a joint tenant on the title
of a piece of real property or other asset.
Income Tax Considerations:
Capital Gain on Sale After First Tenant’s Death
In most cases, someone who inherits property gets a break on income
taxes when the property is ultimately sold. This is because the current
law permits a step-up in the remaining owner’s cost basis to the full market value
of the property at the date of death, which ultimately reduces the capital
gains on the sale. Therefore, if the property needed to be sold immediately
after the first tenant’s death, no
capital gains taxes would be due upon sale of the property.
When two people are joint tenants, and one of the two people dies, only half of the joint tenancy property receives an adjusted new basis at fair market value, since that tenant’s share (half) is the only property being inherited. The basis of the surviving joint tenant’s original half remains the same as when the property was first purchased. Therefore, when the surviving joint tenant sells the property after the first joint tenant’s death, capital gains tax may be due on the appreciated property.
If the joint tenants are married, holding title to the property as community property allows a step-up in the basis for the entire property value at the time of the first spouse’s death. While this avoids the capital gains tax upon the sale, after the first tenant’s death, people should be aware that the titling of an asset as community property can have other implications upon the divorce of the parties; and they should be advised by an attorney before changing title.
Estate
Tax Consequences
The estate tax consequences associated with the joint tenancy
ownership of property depend on whether the property is jointly
held by a married couple or by unrelated individuals. Property
owners should be careful to evaluate how they hold the title
of any real estate as part of their estate planning done to maximize
the unified tax credit upon death.
NONTAX CONSIDERATIONS
Probate Eventually
Joint tenancy does not necessarily avoid probate permanently. The
property could still be subject to probate upon the death of
the last surviving tenant. Therefore, if the property continues
to be held, joint tenancy merely delays probate. The sole surviving
joint tenant still needs to do something to avoid probate upon
his or her death (such as place the asset in a living trust).
Risk
of the Loss of the Asset
A very significant nontax consequence to naming a joint tenant
is the potential loss of the property because of the joint owner.
This is a risk with any jointly-held property. Unfortunately,
most people do not realize that the creditors of either joint
owner can go after (legally, attach) that owner’s interest
in any asset he or she owns, including those owned jointly. This
is true regardless of whether or not the joint tenant contributed
money or assets to any part of the property. If there is an attachment,
a court may order the property sold to settle the attachment.
Incapacity
of the Owner
Unlike joint checking accounts, if you own real estate as joint
tenants and the other joint tenant on the property title becomes
physically or mentally incapacitated, you cannot sell or refinance
the property without court involvement, because both signatures
are required.
If you become disabled, your joint tenancy property may be tied up in a guardianship or a conservatorship proceeding, just when you desperately need it for your own or your loved one’s care. If your spouse is disabled when you die, the probate court will inherit the joint tenancy property and determine how and when it is to be used for your spouse’s benefit.
Unintended
Heirs
Joint tenancy only provides the means for ensuring that your
property will pass to the other named tenant(s). The surviving
owner(s) has full discretion over the asset at the time of his
or her inheritance. The creator cannot control the post-death
disposition of the jointly held property. If you have specific
intentions for the property beyond leaving it to the other named
joint tenant(s), joint tenancy may not be the proper way for
you to hold title.
Conclusion
The ramifications of a joint tenancy should be carefully examined
prior to its creation in order to determine if it is appropriate
for your circumstances. Existing joint tenancy-ownerships
should also be evaluated in order to determine if ownership should
remain as it is, or if termination is preferable, and how best
to resolve any currently existing issues.
For proper estate planning that beneficially accomplishes your goals, you should contact your accountant and/or estate attorney. A little planning now can save you and your beneficiaries significant burden and expense later, as well as ensure that your assets go to those you intend.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Doug Schultz is a CPA and partner in the tax practice at Burr, Pilger and Mayer. Alex Yarmolinsky is a CPA and a manager in the tax practice at Burr, Pilger and Mayer. Both can be contacted at 415-421-5757. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.