The Hazards Using a Will and Joint Tenancy as Your Estate Plan

If you have friends, family or clients that currently hold title to property in California as Joint Tenants, you will want to urge them to change the way they have their property titled.  While joint tenancy has the advantage of immediate transfer of ownership to the survivor upon the passing of one of the joint owners, joint tenancy can also result in significant increase in income tax liability.  Also, if they still have real estate titled as joint tenants, it is a pretty good indication that either they have not done any estate planning or have done estate planning and have failed to change the title of the property into their living trust.

Under current law, if you inherit property, your tax basis in the property will be stepped up to market value as of the day the owner died.  In other words if the property is worth $500,000 when you inherit it and then you sell it for $500,000, you will not owe any income or capital gains taxes.  If the property is held as community property , this scenario is also true as the surviving spouse gets a stepped up basis on both halves of the community property.
However, if a property is held as joint tenants, the surviving owner(s) only get a stepped basis on the ownership of the deceased owner.  Thus if a couple pasy $200,000 for a property, one spouse passes when the property is worth $500,000, the surviving spouse's basis in the property will be stepped up to $350,000 ($100,000 of original basis plus deceased spouses stepped up basis of $250,000).  If the spouse then sells the property for $500,000, taxes may be owed on the $150,000 profit.  If the couple had title the property as community property, the surviving spouse would have received a stepped up basis of $500,000 and then would not have owed any taxes on the sale of the property.
In California, married couples now have the option to hold title as community property with the right of survivorship.  This form of ownership offers the tax advantages of commnity property with the immediate transfer of ownership of joint tenancy.  There is no good reason for property owners to continue to use joint tenancy.  Better yet. when my firm drafts a Living Trust for our clients, one of the documents we create for married couples is a marital property agreement which will convert all joint tenant titled properties into community property once the property is retitled into the name of the trust.  Thus property owners will be able to avoid probate and potentially reduce the tax liability of their heirs.

One additional reason not to rely on joint tenancy to serve as your estate plan is that you may not want the surviving spouse to own the property 100%.  If you intend that your share of the community property including your real estate go to your children, there is no assurance that your spouse will include your children in their estate planning.  This is especially an issue when you have children from a prior marriage for whom you would to pass on your share of the property to.

If you have any questions, please feel free to contact us at 949.242.4514 or use the contact us link to the left.

Brian Chew, the managing partner of OC Wills & Trust Attorneys, has extensive experience in the areas of estate planning, asset protection planning, business succession planning, long-term care planning, and veterans’ benefits. By devoting his practice to estate planning matters, he has founded a firm that strives to provide exceptional service to their clients by working closely with individuals and their families to create comprehensive and customized estate plans. For the past twenty five years, Brian has served thousands of clients in the matters of estate planning, wills and trusts. If you have any questions about this article, you can reach Brian Chew here.