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September 6, 2003: Putting Assets in Joint Tenancy with Children

Q: I think putting all of my children on my things as joint tenants is just fine. I do not believe there are any problems, except for the ones you attorneys invent to scare people.

A: So far in this series we have discussed wills, advantages and disadvantages of living trusts, durable powers of attorney, and property ownership to fit into a person's estate documents.

Besides the basic problems of not having a Will, not setting up durable powers of attorney, and doing a living trust under false assumptions, the desire to just put everything into joint tenancy with children can cause many more problems than solving the problems of probate and supposedly making things simpler.

Lack of space prevents a total discussion of all the problems, but let's look at a laundry list of the more common concerns.

Between a couple with no tax problem, everything should be in joint tenancy. If there is just one beneficiary, such as a child, joint tenancy may be acceptable but read on and decide for yourself. In either case, a Will is still needed if the other joint owner dies first or both die at the same time.

If a parent and two or more children are joint tenants and one of the children dies first, title reverts to the survivors, and any descendants of the deceased child would not receive their deceased mom or dad's share. After such a death, in order not to disinherit, all the titles would have to be adjusted, probably by taking all the assets out of joint tenancy so the Will can govern. Remember joint tenancy takes priority over the Will, so without re-titling, the Will provision that passes a deceased's child share on to the descendants of the deceased child would only apply to assets subject to the Will and the deceased's beneficiaries would not share in any of the property held in joint tenancy.

The real kicker is that if one of the joint tenants refuses to sign to re-title assets, then everything remains in joint tenants, in effect disinheriting the deceased's joint tenant's beneficiaries. Now for real estate we can overcome this problem, and under Colorado law, we also have legal ways to sever joint tenancy of other assets such as stock, bank accounts, etc. Unfortunately other states are more rigid. If a stock account fund or similar intangible property is located or administered in another state, it normally is not cost effective to force compliance using Colorado law, thereby freezing in place the existing joint tenancy and freezing out desired beneficiaries.

Putting property in joint tenancy raises the risk of losing part of the property if one of the other joint tenants has financial problems or files for bankruptcy or maybe is involved in a divorce. Also remember that you have no right to get back what you "gave" even if you need it unless the receiver agrees.

Parents do no like to be reminded that if a child's name is put on assets, the child may take "his or her inheritance" early by forcing a sale of the asset or making mom or dad buy them out. And yes, there have been a few times that the house was sold leaving mom or dad part of the sales proceeds and needing to move.

Next, there are tax problems in adding a name to an asset because a gift is deemed made to the extent that the value of the share exceeds $11,000 for each person added. The gift tax could run as much as 45% of the excess over $11,000 (both state and federal) and must be paid by the person who added the name or names, unless appropriate gift tax forms were timely filed.

On any appreciated asset, whether land, stock, etc., the person added takes over the basis of the giver for capital gains purposes. If inherited under the Will instead of by joint tenancy, then the basis will not be what was paid by the deceased, but valued at date of death. For example, Mom or Dad paid $100,000 for a house that now is worth $300,000. If the house is given to a child by deeding the entire house, then the receiver has a potential tax bill on $200,000 ($300,000 minus $100,000) if the house is sold, or $40,000 in capital gains taxes. If the house had been inherited and sold, there would be no tax.

Sorry, out of space. But I hope you can see that this is not just invention of attorneys to make things difficult. Lawyers are just trying to help in the navigation through the personal, legal, and tax mine field that each of us faces in this area when someone just wants to put a name or two on something in joint tenancy.

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