The pitfalls of joint ownership
To avoid probate it is necessary to move the assets out of your name into the name of someone or something that does not die when you do. Then, at your death, nothing happens; the assets belong to somebody else.
Once the assets are in "somebody else’s" name, that "somebody else" will then be able to withdraw the assets from the safekeeping of the financial custodians at any time they please and do one of two things with them:
1. Give them to your heirs as they verbally promised to do - or
2. Let their greed get in the way and spend the money on themselves!
Hence, you have only a 50/50 chance of any such plan succeeding. Also, consider the possibility that the "somebody else" you have chosen dies unexpectedly and your assets are inherited by their heirs!
Transferring the assets out of your name is not difficult; anyone can give their assets away while they are alive. You don't need anyone's permission. It is pretty obvious then that the trick is to give your assets to somebody else before your die yet somehow maintain full and legal control of the assets! That’s like trying to sell your car to your neighbor with the stipulation that you still get to drive the car anytime you wish. That prerequisite will kill just about any deal you try to make! Maintaining control of assets you no longer own is a mighty tall order and it is where the home remedies begin.
Questions? How to contact Gordon Mead Bennett immediately!
Home remedies that don’t remedy
First, many people believe they can avoid probate by giving joint ownership in their assets to their spouse (listing the names of both spouses on the titles and deeds of the assets). Because joint ownership of assets with a spouse always supercedes the provisions written in a will, the deceased spouse's jointly owned half of the estate passes immediately to the surviving spouse at the moment of death. No probate is required.
However, if there is no living co-owner listed on the titles of the assets when the surviving spouse dies, the Last Will and Testament of the surviving spouse must then be probated. Thus, joint ownership serves only to delay probate until the death of the surviving spouse.
Second; perhaps the most popular home remedy for avoiding probate is the transfer of assets to the children, jointly or wholly, before death. This is a costly no-no since it exposes the children to exorbitant capital gains taxes when the children sell the property a few months or years up the line.
Few people fully understand the basics of capital gains taxes, often confusing them with estate taxes. In fact, many people do not understand capital gains. A capital gain occurs when an asset increases in value during the time you own it. As an example: you purchase a house in 1977 for $20,000. In 2007, thirty years later, you sell the house for $120,000. You have realized a capital gain of $100,000. Uncle Sam looks upon this gain as a profit and currently places a tax on that profit of approximately 15 percent (in this case, roughly $15,000). For a parent, new capital gains exemptions will usually offset any such capital gains tax. However, it is much more difficult for heirs to take advantage of these new laws.
When your children inherit such appreciating assets (assets that increase in value during the time you own them) from you via a Living Trust or will at your death, Uncle Sam allows your children to inherit that property at its market value at the time of your death. That house you bought 30 years ago for $20,000 is inherited by your children at its current, government-allowed market value of $120,000.
After inheriting the house the children can turn around and sell the house for $120,000, realize no profit (capital gain) and pay no capital gains taxes. The legalese term for this most generous gift from the government is stepped-up valuation.
However, if you give the child joint (half) ownership of the house before you die, the government will consider this a gift, not an inheritance. The value of your gift to your child is half of your original $20,000 investment in the house ($10,000), not half of its debatable market value at the time you made the gift.
When you die, the child, which already owns the half of the house you gifted to him through the joint ownership arrangement years before, inherits that half of the house you retained in your personal ownership at its stepped-up value of $60,000 (50 percent of the current market value of the whole house: $120,000).
The child cannot possibly inherit the other half of the house; a physical impossibility. The child already owns the other half of the house. You gave it to the child as a $10,000 gift years before you died!
Adding the two halves together (the $10,000 half of the house received as a gift and $60,000 half of the house received as an inheritance), the IRS says the child has $70,000 invested in the house. If the child now sells the house for its current $120,000 value, the child will have realized a $50,000 capital gain (profit) and will owe the government approximately $7,500 in capital gains taxes (15 percent). That will far surpass what it would have cost the child to inherit the entire house through your will and pay the probate fees!
In other words, giving your appreciating assets to your children, jointly or wholly, before you die springs the Capital Gains Tax trap and always turns out to be the most expensive way of all to convey your assets to your kids!
It is an even bigger financial disaster if you give the child the whole house (both halves) before you die and take a lifelong lease on the property. The child will then receive no stepped-up valuation whatsoever and would be faced with a $15,000 capital gains tax bill if he/she sold the house for its market value of $120,000.
And remember, this bleak picture applies to all appreciating assets you gift to your children before you die: stocks, mutual funds, rental properties, etc.
In addition to the stepped-up valuation problem, you are also in constant risk of having an asset in which you hold half interest attached or seized to satisfy some legal scrape in which your child has become entangled.
Questions? How to contact Gordon Mead Bennett immediately!
Other joint ownership "highlights"
There is another cute little wrinkle that often shocks those who believe joint ownership with children to be just a gimmick with which to beat the system:
Should the child be dispossessed of his/her own home by the bank, tax collector or divorce court, or just decide that he/she likes the view from Dad and Mother's living room better then his/her own, the child has the legal right to move in with Dad and Mother - furniture, four kids and spouse - at any time and stay for as long as the child determines. The parents will get no sympathy from a judge if they try to put the child out. The child legally owns as much of the house as do the parents and has a perfect right to live there!
Thus, if you are either a parent or a child involved in such a joint ownership arrangement, you should sit down with the other party and immediately reverse this imbroglio before it puts a serious hole in your ship of state - or ship of well-being.
Questions? How to contact Gordon Mead Bennett immediately!
A special, frank note here:
I talk to many people every year who claim they paid no capital gains taxes when they sold property they originally held in joint ownership with their now-deceased parents. Thus, they plan to employ the same scheme with their own children.
I don't doubt them at all. However, I know that to avoid such capital gains taxes it is necessary to bear false witness to the Internal Revenue Service on a 1040 tax form (commonly known as lying).
There are literally millions of real estate transactions each year in this country and the government does not have the personnel to track down all of the older records that indicate what a piece of real estate was purchased for or built for 50 years ago. This has resulted in many a "slip of the pen" when reporting the sale of real estate.
Tragically, such slips are often set in motion by an accountant or tax attorney with a sly smile or wink of the eye. The client does not realize that accountants and attorneys have ways of covering their own butts. After all, they just copy down the figures they receive from the client. Jail time is always done by the client.
With the proliferation of the computer, which produces not only better records but also quicker and more accurate tracking, the noose is beginning to tighten. The penalties for getting caught are stiff and quick. They are also totally foolish since a Living Trust (accomplished with the exact same paperwork and flux to quitclaim joint ownership in property to children) easily and legally gets around the problem and allows a person to sleep well at night.
In other words, it is just as easy to do it legally as it is to do it illegally!
Go to Lesson 5
