You own assets jointly with others

There's a common misconception that owning a home or another asset jointly with your spouse or child is an effective way to transfer the asset. It's true that, when people own property as joint tenants with rights of survivorship and one owner dies, the deceased owner's interest is automatically transferred to the survivor without going through probate. But joint ownership can have significant tax disadvantages.

For a married couple, it can waste one spouse's estate tax exemption. Suppose that you and your spouse jointly own a home. When you die, your interest automatically goes to your spouse tax-free under the marital deduction. Let's say that, when your spouse dies, the home is worth $10 million. Assuming a $5 million estate tax exemption and a 35% marginal rate, the home will generate $1.75 million in tax liability. You can avoid this tax by owning the home in equal shares as tenants-in-common and leaving your share to a credit shelter trust.

QPRT-familyAdding your child's name to an asset's title as joint owner also can be a costly mistake. For one thing, it's considered an immediate, taxable gift of half of the property's value. What's more, joint ownership doesn't remove the home from your taxable estate (though an adjustment is made in computing the estate tax liability that offsets any prior gift tax reporting, so there's no double tax). Finally, it gives your child control over the property and exposes it to claims by the child's creditors.

Income taxes can also be a concern, especially if a jointly owned home is your principal residence and you sell it, which would normally qualify for special tax treatment. If you own only 50% of the property, only that percentage is eligible (unless the joint tenant also resides in the home and meets the other requirements). Before adding a joint tenant to your property, consider alternative ways to hold the property and still accomplish your objectives.

Back to Udell Associates


This information is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2011 IEP