Property can be owned and titled in different ways. Some of the more common ways to own property is called “joint tenancy (with rights of survivorship)” and “tenancy in common.” This blog will explain the differences and what some of the pitfalls can be by adding a co-owner to an asset.
What is Joint Tenancy?
Joint tenancy is a legal form of ownership in which two or more people own property which is subject to titling, such as real estate, cars, bank accounts, money market accounts, certificates of deposit, etc., in both or all of their names. Each so-called joint tenant has an ownership interest in the entire property that is subject to the joint tenancy, meaning they have a joined interest in 100% of the property rights. As a result, ownership of the property automatically and instantly passes to the surviving joint tenant(s) upon the death of a joint tenant.
What is Tenancy in Common?
Tenancy in common, which is different from joint tenancy, refers to a property ownership arrangement in which each person owns a particular percentage of the property. This means two tenants in common could, for example, own a 50% interest each in the property. As a result, when one tenant in common dies, the Decedent’s interest will not automatically transfer to the surviving tenant(s) in common. Rather, the Decedent’s share will pass to the person(s) named in his or her will or trust or, if the Decedent has none, according to state law. In Colorado, if a deed to real property does not explicitly list joint tenancy ownership, the real estate is owned as tenants in common.
Here are some of the most common pitfalls:
1. Believing You Will Avoid Probate Because the Deed Lists Multiple Owners
Just because the deed may list husband and wife or parent and child as the owners on the deed to the house, it does not mean that you will avoid probate. As mentioned above, unless the deed explicitly states joint tenants or joint tenancy, in Colorado, the property is owned as tenants in common.
2. Capital Gains Tax implications
The Internal Revenue Service (“IRS”) provides each of us with a capital gains tax exclusion on the sale of our primary residence. In 2015, the exclusion amount for a single person is $250,000. For a married couple it could potentially increase to $500,000. By adding a joint owner or tenant in common, you could forfeit the exclusion when you sell the home because the home may not have been the primary residence of the co-owner.
Additionally, beneficiaries inherit assets at the time-of-death value, resulting in a so-called “step-up-in-basis.” This means that beneficiaries could potentially avoid capital gains taxes on highly appreciated assets. However, by adding co-owners to the deed of the house and/or investment and bank accounts while you are still alive, the IRS considers this a gifting of the assets during your lifetime, which causes capital gains taxes at the time the asset is sold, even if the sale occurs after your death.
3. Joint Ownership Can Undermine Your Estate Plan
Because joint tenancy property passes to the surviving joint tenant instantly upon death, such property does not pass according to the deceased joint tenant’s will or trust. In other words, joint tenancy has priority over a will or trust. This has to be taken into consideration when drafting your estate plan and adding co-owners to assets. You accidentally disinherit a child or leave an unequal amount, causing a family feud.
4. Joint Ownership Can Lead to Unwanted and Unforeseen Risks
All joint tenants are owners of the property. Therefore, even if a joint tenant does not think about the property as being his or hers, by law, it is still is. Therefore, the joint tenancy property is placed at the same risk as any other property owned by that person. For example, parent adds responsible daughter to he name of the deed as joint owner. If daughter were to declare bankruptcy, parent’s house is now likely in bankruptcy court. Similarly, if daughter were to get divorced, former spouse could be entitled to a portion of parent-in-law’s house.
5. What Should I Do?
Adding a co-owner to an asset could lead to some intended results. Oftentimes, however, they will also lead to unwanted results. Before adding a co-owner to any asset, please meet with an experienced estate planning or elder law attorney to uncover the potential risks as well as go over alternatives.
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