A joint tenant co-owner is simple and low cost plan for post death transfer, but it has its perils.
HUNTINGTON BEACH, Calif. (PRWEB) February 21, 2019
Adding a joint tenant co-owner who is not a spouse to real property opens up the possibility of many unintended consequences. This Tip Sheet by DeedandRecord identifies the perils of and alternatives to co-ownership. The unintended consequences are; unfavorable tax treatment, exposure to the new owner’s creditors, relinquished control to sell and mortgage the real property and failure to transfer due to an unplanned order of death. Viable alternatives to joint tenancy are Transfer on Death Deeds and revocable living trusts.
Joint tenancy is a form of co-ownership of real property where more than one person owns the real property and each owner has equal ownership. Every joint tenancy includes a "right of survivorship" such that, upon the death of one joint tenant, the deceased joint tenant's share of the asset transfers to the surviving joint tenant or tenants at the moment of death without the need for probate administration.
Title is cleared by recording an affidavit of death of joint tenant with a death certificate attached. Joint tenancy overrules wills and trusts. This straight forward change of ownership is fairly easy to understand and is low in cost.
The first major problem with joint tenancy is unfavorable tax treatment. The new joint tenant’s ownership interest is increased to fair market value for the property tax base. The property tax base is protected for parent to child transfers. But all other owners will see a markup of the property tax base.
The other unfavorable tax treatment is on capital gains tax. Lifetime gifts of real property transfer the original owner’s purchase price or “basis” to the new co-owner. Death transfers of real property receive an adjusted basis to fair market value as of date of death. So, for lifetime transfers of real property with a low purchase price compared to a higher current market value the result is an additional capital gains tax on the subsequent sale of the real property.
The second peril is the new co-owner. The new co-owner’s creditors can look to the real property as a source of repayment. Additionally, the new co-owner must sign off on any sale or financing that uses the real property as collateral. A new co-owner takes away control from the original owner.
An alternative is a deed recently created by the California legislature, the Revocable Transfer on Death Deed (“TODD”). A TODD does not change ownership and as a result has no unfavorable effect on property tax and capital gains tax. These deeds are straightforward and low cost.
The major drawback is title companies will not issue title insurance for 3 years after the death of the owner. This in effect prohibits the sale or use of the real property as collateral by the new owner for a period of three years. Another drawback is a TODD cannot provide for a contingency if there is no living beneficiary on the date of death of the owner.
Another viable alternative is a trust. The problems with a trust, is the cost and probably more importantly, its complexity. Trusts are not easy to understand and require transfer of ownership into the trust. This requirement of trust ownership is often overlooked which results in probate administration. But a properly funded trust allows for contingencies, avoids probate, is private and has favorable property tax and capital gains treatment.
The unintended consequences of adding a co-owner to real property are; unfavorable tax treatment, exposure to the new owner’s creditors, relinquished control to sell and mortgage the real property and failure to transfer due to an unplanned order of death. Viable alternatives to joint tenancy are Transfer on Death Deeds (“TODDs”) and revocable living trusts. But TODDs are new and not fully tested. Trusts are complicated but when properly funded avoid probate, are private, do not create unfavorable tax consequences and the owner maintains control of the real property.
This press release was authored by Mark W. Bidwell, an attorney located in Orange County, California. Office is located at 4952 Warner Avenue, Suite 235, Huntington Beach, California 92649. Telephone is 714-846-2888. Email is Mark@DeedandRecord.com