Deductions/Education/Gift&EstatePlans/HomeownershipIncentives/
Investments/RealEstate/RetirementPlans/HomePage
Many of us get into joint tenancy ownership without thinking about it-sometimes even when we do not particularly want to do it. This article is an update with respect to the problems that I have recently seen or heard of involving people who own real property in joint tenancy.
The advantage to joint tenancy is that the property passes to the other joint tenants upon any joint tenant's death. Thus if a property is owned by mother and three children, then if the mother dies, the property automatically passes to the three children without probate or other administration. Of course you will need to file for the parent to child exemption from Prop XIII property reassessment but that is about all that needs to be done after the property is retitled. And if a couple own their home in joint tenancy, then if one dies, then the property passes to the other without probate or other administration.
It is possible to sue in court to break up a joint tenancy, in which case all tenants get an equal share of the property.
For estate tax purposes, where a decedent purchased property, which is held in joint tenancy, then the decedent is treated as owning the entire property except as to the percentage that it can be shown that the other joint tenant(s) contributed to the purchase. With respect to the step-up in value that occurs normally upon death, there is a 100% step-up to the extent that the property is included in the taxable estate of the decedent, pursuant to the above provision, but no step-up to the extent that the value of the property is excluded due to the contribution of the other joint tenant(s).
The first case involves one of my clients, a mature man now. When he purchased his first home many years ago, his closest relative and person he cared about was his sister "Sis." So, he recorded the ownership upon purchase as joint tenancy with "Sis." "Sis" died a year or so ago, 30 years after purchase, leaving a significant estate. He needed to do some serious talking to convince the I.R.S. that despite the fact that "Sis" had a joint tenant's interest in his property, in fact, that had been done merely as a testamentary devise for him and that no gift to her had been made and she had no ownership interest in his property. It was a lot of hassle for not much advantage.
Another case dealt with a client whose son (the apple of Papa's eye) and his son's wife needed help in purchasing their dream home (money for the downpayment) and help in qualifying for the loan (Papa on the loan). The family and the lender solved their problems by making Papa a joint tenant with son and son's wife. Since Papa's attorney and I were spending a fair amount of time making certain that Papa did not have a taxable estate, and this dream home in Saratoga was certain to appreciate, we saw to it that the deal was restructured A.S.A.P.
Now come the cases I have read or heard about recently. The first deals with the classic situation in California a married couple who owned real property as joint tenancy. As indicated above, this was done so that it could pass to the surviving spouse without fuss or muss. Just present a death certificate to the county recorder and the property is re-titled.
Now the further wrinkle is that if real property is community property that is property purchased by a married couple with money earned by either of them while married-then it receives a double step-up in basis upon the death of either. This law was enacted to try to equalize the treatment in community property states for the treated in common law states such as New York with the husband will typically have title to all real property and then (on a statistical basis) die first.
The question that has been open is what about community property held by married people as joint tenancy for convenience-does it get a double step-up in basis? Although the I.R.S. had argued for several years that joint tenancy should not be treated as community property, it was only in 1998 that the U.S. Tax Court agreed. In the Estate of Young, the Tax Court held that even when the source of funds to buy real property was community, if the property was held in joint tenancy at death, then only a 50% step-up was available to the surviving spouse.
Where community funds have been used by a married couple to acquire property that is held in joint tenancy, there are two ways to "turn it into community property". One is to prepare or to have prepared a community property transmutation document. This is usually a one page or so statement saying that all or some of the couple's joint tenancy property is actually community property. This is done while both spouses are still alive. Then the property can be put into a living or revocable trust to avoid probate.
If the real property was not put into a trust, when the first spouse dies, and the surviving spouse inherits by law or under the decedent's will , then the surviving spouse needs to file or have filed in the Superior Court of the county of residence a spousal property petition (under the community property set-aside procedure) so that the real property subject to the petition is then treated as community property despite the legal title of the ownership being in the names of the spouses as joint tenants.
The last situation I heard of dealt with a joint tenancy set up between a mother and her son. It had been set up many years ago, when the property was low in value. The mother intended then and still intended that the son inherit the property. The property escalated in value and the mother had come to have a significant estate with significant estate tax. What was done was that the joint tenancy was severed so that the son was left with one-half and the mother was left with one-half. The original transfer into joint tenancy was treated as a gift that occurred when the tenancy was put into joint tenancy. A gift tax return was filed reporting the original gift. Since at death, the mother would only own one-half of the property, her estate tax exposure was significantly reduced. This is a good example of what can be done in the way of pre-death estate planning. Once the mother would have died, nothing could have been done.
However neat the last case is, you should remember that there are additional dangers to joint tenancy-you could have someone on joint tenancy and forget to change the title even when the facts change. I am sure there are plenty of cases where ex-spouses get a windfall due to carelessness.
Copyright Eleanor S. Hansen 2000
Deductions/Education/Gift&EstatePlans/HomeownershipIncentives/