February 15, 2008

More ways you can mess up your estate plan—part IV

By Robert P. Bergman, Attorney
Special to the Times

The continuing saga of Ways You Can Mess Up Your Estate Plan

#8. Putting your home (or other assets) in joint tenancy with children

When you put your home (or any other asset) in joint tenancy with your children, it is more than saying "I want you to have this after I am gone." Your children become co-owners of the property. Here are some problems if you put your children on real estate, such as your home:

First problem: Putting your home in joint tenancy with your children is a taxable gift under IRS regulations. Either you have to pay gift tax on the percentage value of the gift you have made in your home, or the amount of the gift will be added to the value of your total estate when you die, which could end up costing a large estate tax bill.

Second problem: If you want to sell your home, you can only use your federal capital gain tax “primary residence exemption” of up to $250,000 of the gain on the sale on your fractional share. If your fractional share of the value is less than the $250,000 exemption, you will lose the excess benefit of the exemption.

Third problem: In a related issue, because you made a gift of interest in your home, your children also receive a gift of your cost basis in your home. Cost basis is the value of your home for the purpose of calculating any taxable capital gain on the sale of your home. For example, if you paid $150,000 for your home and it now worth $600,000, and you then put your two children on as joint tenants, each of your children receive a cost basis of one-third of your cost basis, or $50,000 each.

At your death, your interest in the property receives a “step up” or increase in the cost basis for tax purposes. However, the interests of your children will not receive the same step up. Their cost basis will be $50,000 each, plus one-half of your one-third $200,000 interest in the property, for a new basis of $150,000 for each child. Each child will also have a taxable capital gain of $150,000 when the property is sold for $600,000. The entire taxable gain could have been avoided for your children if the house had still been titled just in your name, or if it had been owned by a revocable living trust.

Fourth problem: If your child has any lawsuits against him, is going through a divorce or has a tax lien against him, you may find out that you no longer own it with your child, but with your child's creditors or predators. They can actually force the sale of your home to get at your child's fractional share. You may have to come up with the money to pay off your children’s bills in order to keep your home from being sold.

Fifth problem: If you want to borrow money against your home or refinance in order to repair your home, add on to your home or just need more money for your medical care or other needs, you will need to have your children’s permission to do so, because they are owners of the house.

Sixth problem: If you are hoping to avoid probate by putting your children on the title of your home, you are making the assumption that you will die before your children. In my own family, I have lost four cousins who died in their 40s before both of their parents. I also had a good friend who died at the age of 26, the youngest of three children. In those cases, a joint tenancy with children would not have avoided Probate at all!


Robert P. Bergman is a San Jose estate planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for incapacity and the eventual transfer of their property to their heirs. Bob specializes in working with parents who have minor children. Bob has regular seminars on the use of wills and trusts in estate planning and issues for parents with minor children. Visit his website at www.lawbob.com where you can learn more, get on his mailing list, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics that Bob has written. You can also reach him by e-mail at rpb@lawbob.com or telephone at (408) 247-0444. All inquiries are confidential. This column is intended to provide general information about estate planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.