When it comes to estate planning, many homeowners consider adding their children as joint tenants to their home. This approach has an initial appeal due to its simplicity and the avoidance of probate. However, it's crucial to understand the significant risks and disadvantages that come with this strategy. Let's explore why this might not be the best option for your estate plan.
What is Joint Tenancy?
Joint tenancy is a form of property ownership where two or more individuals hold equal shares in a property. A key feature of joint tenancy is the "right of survivorship," which allows the property to pass automatically to the remaining joint tenants upon the death of one tenant, bypassing probate.
The Initial Appeal of Joint Tenancy
- Bypassing Probate: Joint tenancy allows for the straightforward transfer of property upon the death of one tenant, avoiding the probate process.
- Immediate Transfer of Ownership: The right of survivorship ensures an immediate transfer of ownership to the surviving joint tenants, simplifying the inheritance process.
Risks and Disadvantages of Adding Children as Joint Tenants
- Loss of Control Over the Property
- Decision-Making: Once children are added as joint tenants, the original owner loses sole authority over the property. Significant actions, like selling or refinancing the home, require the consent of all joint tenants.
- Potential Conflicts: Disagreements among joint tenants can complicate decisions about the property, potentially leading to legal disputes.
- Exposure to Financial Liabilities
- Divorce Settlements: If a child goes through a divorce, the property could be considered part of their marital assets, making it subject to division.
- Creditor Claims: Creditors of a child who is a joint tenant can place claims against the property, putting the entire home at risk.
- Bankruptcy Proceedings: If a child files for bankruptcy, their interest in the property may be included in the bankruptcy estate, potentially forcing a sale to satisfy creditors.
- Tax Implications
- Lack of Step-Up in Basis: Adding children as joint tenants during the owner’s lifetime means the property does not receive a step-up in basis for the portion of the property that has already passed to the children.
- Capital Gains Tax: If the children sell the property after the original owner’s death, they could face significant capital gains taxes on the appreciation of the property's value from the original purchase price to the sale price.
Alternative Estate Planning Tools
- Revocable Living Trust
- Control: The original owner retains control over the property during their lifetime and can modify or revoke the trust as needed.
- Probate Avoidance: Assets in a revocable living trust bypass probate.
- Incapacity Planning: The trust can include provisions for managing the property if the owner becomes incapacitated.
- Step-Up in Basis: Upon the owner's death, the property typically receives a step-up in basis, potentially reducing capital gains taxes for the beneficiaries.
Conclusion
While adding children as joint tenants to a home may seem like an easy and effective estate planning strategy, it comes with significant risks and disadvantages, such as loss of control, exposure to financial liabilities, and adverse tax implications. Alternatively, using a revocable living trusts offers more control, protection, and tax benefits.
Consulting with an estate planning attorney is crucial to fully understand the implications of different property transfer strategies and to tailor a plan that aligns with your personal and family goals. An attorney can provide expert advice on the best methods to achieve your estate planning objectives while minimizing risks and maximizing benefits.
Planning your estate is about making informed decisions that protect your assets and ensure your wishes are carried out. Taking the time to explore all options will provide peace of mind for you and your loved ones. Contact the attorneys at Jeffrey Burr. We have been serving the Las Vegas community for more than 40 years and we will be happy to help you.
