Published in the Portsmouth Herald (10/27/2019)
How many of us have a joint bank account, either with a spouse, child or parent? Similarly, when we make the plunge and buy a house or condo, quite often we purchase the real estate jointly with someone else. Is this a good idea? What happens to jointly owned property at death? Do the provisions in a will or revocable trust prevail?
If property is owned as “tenants in common” (the most common form of joint ownership), then a co-owner has the right to sell his or her interest to anyone, without the consent of the co-owner. There is also some risk because the property may be subject to the claims of the co-owner’s creditors. When a co-owner dies, his/her share of the property will pass according to his/her will (or other testamentary document such as a trust). If an owner dies without a will or trust, then the property passes under the intestacy laws of the state (to prescribed relatives, whether or not that was desired). The other co-owner continues to own his or her share.
As a practical matter, consider this scenario. Alex, Ben and Charlie buy a beach house together as tenants in common. This works fine for a few years, but then Alex starts experiencing financial difficulties and wants out. He wants to sell the beach house, but Ben and Charlie don’t. He asks them to buy his share, but they don’t have money to do that. Alex tries to find a buyer, but can’t find anyone who wants to co-own the house with Ben and Charlie. He’s stuck. Meanwhile, Ben dies unexpectedly and it takes over a year for his estate to get settled, and now Ben’s ownership transfers to his elderly mother. Now Alex, Charlie and Ben’s mother are co-owners. As you can see, joint ownership can be tricky and may lead to unintended consequences.
Consider another scenario. Your elderly father can’t manage his own affairs well any longer, and unbeknownst to you, has your sister Sue added to his bank account that is a “payable on death” account or is held jointly with rights of survivorship so she can pay your father’s bills for him. With either designation, when a co-owner dies, the survivor inherits. Whoops! Even if your father had a will or a trust that said you were supposed to inherit equally with your sister, Sue will automatically own all assets in these types of accounts, superseding any provision in your father’s will or trust. The same is true if someone owns property as joint tenants or as tenants by the entirety: in this type of joint ownership, the survivor inherits.
While this can be an effective method of transferring property after death, there are often unintended consequences. Some disadvantages to owning property jointly in this manner include:
Higher income taxes. Usually property transferred at death gets a “stepped-up basis,” which means heirs can sell it without capital gains tax implications. This is a benefit most often with real estate and investments (e.g., stock ownership) that have appreciated significantly since purchase. However, when property or a bank account is owned as joint tenants, a joint owner’s share of the property does not get the stepped-up basis. This means any appreciation in the joint owners’ share of the asset between the time the joint owner is added and the date of death will be subject to capital gains tax when sold.
As an example, let’s compare what happens if your father bought his house in the 1980s for $305,000 and put your name on the deed as a joint tenant. When he died in 2019, the waterfront house was now valued at $2,153,200. If you were on the title with your father as joint tenants, you know own house, outright. Great! But if you want to sell the house now, you will be considered to have the same cost basis ($305,000) and will not benefit from the step up in basis. You are likely to have to pay capital gains tax on the gain: $1,848,200 will be subject to capital gains tax (which, depending on your tax bracket, may be as high as 20%).
In contrast, if you were able to inherit the house after your father’s death and get the stepped up basis, your basis in the house would be considered to be $2,153,200. Much better, particularly when you live in a state such as New Hampshire, which does not impose any estate tax at death.
Potentially higher gift and estate taxes. Adding someone’s name to the title of an asset (such as a house) is considered a taxable gift. If the gift’s value exceeds $15,000 (in 2019), a federal gift tax return should be filed. As above, the property transferred will not be eligible for a stepped-up basis at death. The property retained by the original owner remains in the original owner’s estate.
So, while co-ownership of property is common, it pays to pay attention to the details. Understanding certain forms of joint ownership will prevail over the terms of a will or trust will help insure you properly title assets or place them in a trust.
Linda Garey is counsel in the Trusts & Estate Department at McLane Middleton, P.A. She can be reached at (603) 628-1325 or at [email protected]. McLane Middleton is the largest law firm in New Hampshire with offices in Manchester, Concord and Portsmouth as well as Woburn and Boston, Massachusetts.