Transferring Title Through Joint Tenancy
Here is the scenario: Mary Mother is a single parent of one child. She had set up her son as the Pay-On-Death Beneficiary of her bank accounts. Now, Mary wants to figure out a way of transferring her home and rental properties to her son without making a trust, yet still avoiding probate. Mary subsequently learns that the only way for a person to transfer real property to their child without a trust, while still avoiding probate, is to place their name on title as a joint tenant.
Upon Mary’s death, Mary’s son would record an “Affidavit – Death of Joint Tenant” with the proper County Recorder to clear the title. The property would thereafter be owned exclusively by her son.
Sounds easy, right? You would be correct; doing so is very quick, easy, and inexpensive. However, there are significant drawbacks to doing this type of self-help estate planning. The first is that Mary’s son would be a co-owner of the house. There are two obvious problems with this. (1) His creditors could go after the house to collect on judgments against him, and his interest in the home would be an asset if he ever declared bankruptcy. (2) If Mary had a falling-out with her son, her son could break the joint tenancy by recording a deed from himself to himself, and then petition to force a sale of the real property and split the equity. There is no way to force him to return the property.
The second drawback is that, in addition to any immediate gift tax issues, the son would lose the step-up in basis he would get by receiving the property on the parent’s passing. Consider this. Let’s say you purchased the house at $400K, and it is currently worth $600K. You pass away in 2020, when the property is worth $800K, and your child sells the house immediately for $800K. If you transferred the property on death, through a trust, your child would pay no capital gains tax because he would have assumed ownership at $800K. However, if you grant him an interest now, at $600K, he would have to pay capital gains for the increase to $800K.
It’s far better, and safer, to pay a competent attorney to create a trust that will protect your property for yourself while you’re alive, and for your child on your passing. If you would like more information on this topic, please contact us for a free consultation.