Probate

Why Not Joint Ownership to Avoid Probate.

• Joint Ownership Increase Taxes Paid to the IRS.
  
  Many people believe that if they merely place their child’s name on their stocks, bonds, home, and bank accounts, that this is sufficient to avoid probate. Such joint ownership may delay, but will NOT avoid probate. the last joint tenant will always go through probate, AND it will increase taxes paid to the IRS because joint tenants receive only a partial step-up in basis in their property. For example, suppose you own real estate or stocks or bonds and purchased them years ago for $10,000. Today’s market value is $210,000. If you sell any of these assets during your life, you will have to pay capital gains tax on the difference between what you bought it for and what you sold it for.*
  
  Suppose that you place your only child’s name on one of the above-listed assets, thinking that when you die, the child would automatically receive this asset. Upon your death, the child, if he or she were still alive, would receive this asset, but the new basis is not full market value. Only your half interest in this asset (decedent’s portion) steps up to market value of $105,000. The child’s basis for the half interest in the property remains at the original cost basis of $5,000. Therefore, the child’s new overall basis would be $105,000 + $5,000 = $110,000. Now if the child sells that asset, he or she must still pay capital gains tax on the difference between the market value of $210,000 and $110,000. Today, the capital gains rate is 15% federal and 8% State, for an overall 23% capital gains tax rate paid on $100,000. thus, the child upon sale of the asset, would have to pay approximately $23,000 in capital gains taxes.
  
  On the other hand, suppose you had the same property IN TRUST OR had paid the expensive probate fees. The child would receive ALL property at market value on date of death of the last surviving parent. In this event, if the child sold the property at market value on date of death, zero capital gains tax would be due and owing.

  * Note that each homeowner has a once-in-a-lifetime exemption of $250,000 on the home if you lived in it for at least 2 year



• Unintended Dispositions.
  
  Placing your home in joint tenancy may lead to an unintended person(s) receiving your home. For example, suppose that you are the last surviving parent with five children. You place your eldest son’s name on the deed to your home, telling him that when you die, you want him to sell the home and divide the money equally between all five children. You trust your child to do this. On your death, he or she becomes the sole owner of your home. This child fully intends to do as you wish, but before he sells the home, he dies in an unanticipated medical operation. His wife of one year, who has been married before and has children by a prior marriage, claims ownership of the home by virtue of your son’s Will, which leaves everything to her. Will she be successful? Probably yes, and she in turn may leave the property to her children, which was far removed from your original intent to leave the home equally to your children.
  
  Additionally, on your date of death, if your son became the sole owner of your home and did NOT die, he would only receive a partial stepped-up basis in the home as described in Paragraph A, and would therefore have to pay capital gains tax on sale of the residence before distribution the proceeds to his brothers and sisters. home equally to your children.
  
  Another type of unintended disposition occurred with the death of the famous actor James Dean. Mr. Dean’s mother died when he was young and his father sent him to his aunt’s home to live. His aunt raised him along with her own family and he grew to love his aunt and her family as his own. Mr. Dean had often stated to his friends that he intended to leave all of his wealth to his aunt’s family. Nonetheless, Mr. Dean never prepared a Will or a Trust, and when he died, he was survived by his father. If a California resident dies without a Will or a Trust, the State of California writes a Will for him or her. In Mr. Dean’s case, all of his wealth was transferred to his father by the Court because this disposition complied with the laws of the State of California.
• You Can End Up with Numerous Owners as a Tenant in Common
  
  Suppose, instead, you held title to your home as tenants in common with a spouse. Remember, that you can will your interest in the home as a tenant in common. If you die without a Will, the State of California writes your Will for you and your property is disposed of according to the laws of the State of California.
  
  If you or your spouse had children by a previous marriage and were holding title as tenants in common, then on the date of death of the first spouse to die, the deceased spouse’s share may go to his or her children, and now you would own the property with five other people. Decisions regarding the sale or rental of a home are difficult with only two people, but become much more difficult with six owners.
• Potential Lawsuits Where Joint Owners are Concerned.
  
  To the extent that you place your assets such as stocks, bonds, and real property in joint ownership, you expose that asset to attachment if your joint owner ever has a judgment rendered against him, fails in his or her business, or suffers a divorce, and, as a result, creditors of the joint owner are looking for assets to attach. Remember, that if your child’s name is on your bank account or other asset, that asset legally belongs to the child and can be attached to pay that child’s debts. Also, if the asset itself, such as a rental house, becomes the subject of a dispute because of actions of the joint owner, you will also be involved in the lawsuit.
• If the Joint Owner Becomes Incapacitated Probate
  
  If the person with whom you hold title jointly becomes incapacitated and can no longer handle his or her own affairs, the joint owner will now become involved in the probate process as explained above and the Court will make the final decisions regarding sale of assets. To the extent that you own assets jointly with the incapacitated person, you also must become involved with the Courts. You no longer make a unilateral decision to sell the asset. You must seek the Court’s permission and approval.
• Joint Ownership Merely Delays Probate
  
  When you place a child’s name as a joint tenant on the face of a Deed, Stock, or Bond, the child, if alive, will receive the asset without probate---be it at the original cost basis. Nonetheless, on the death of the last joint tenant, the asset will go through probate. Therefore, no matter how many joint tenants you name on an asset, you will ALWAYS suffer adverse tax consequences because of the basis problem, and THE LAST JOINT TENANT WILL ALWAYS GO THROUGH PROBATE.