Often, parents think the easiest way to pass assets to their children is to simply add the children onto their deed or bank account. “I know this avoids probate because it’s how my parents did their estate plan.” No one wants to go through the public probate process, but not all methods are best for transferring ownership.
So why don’t we recommend joint tenancy with children for estate planning purposes?
- The transfer could trigger gift tax that would otherwise be avoided with an inheritance
- The property is susceptible to the children’s creditors
- The children would not receive a step up in basis upon the parent’s death
- The children have no protection from creditors or in the case of divorce
- The children could use the assets for themselves before the parent’s death and possibly without their consent
- Joint tenancy does not address incapacity or disability issues
- The parent needs their children’s permission to sell the asset because it is now their asset too
For example, just this week I received a phone call from a client who transferred his primary residence to his children as joint tenants a few years ago. The father and children have since become estranged and he needs to sell his house so that he can afford to move into an assisted living community. One child will only agree to sell the property if that child receives half of the proceeds from the sale. Now Dad is unable to sell it without giving half the proceeds away, even though this child never paid for the property and never monetarily contributed to its upkeep, maintenance, or improvements. Without his child’s participation, he will be unable to close on the sale.
This is a tough dilemma, and the saddest part is it could have been completely avoided had he transferred his residence into his trust and not given an ownership interest to his children. He would still have the control necessary to sell the property and would be entitled to all of the needed proceeds for his living expenses.
Allison Manning enjoys helping clients establish peace of mind in their estate plans and building relationships with her clients. If you would like to make an appointment to find out how we can help protect your legacy, call (520) 529-4000, or visit us online at www.KHarizona.com.