10M // Real Estate & Home Builders Guide // December 2017
Joint ownership is an inexpensive way to avoid probate
By Ilyce Glink and Samuel J. Tamkin
Tribune Content Agency
Q
: My mom sold her property and put
all of the proceeds into a joint account
that she, my brother and I are listed on.
She wants to purchase a small property
for all cash, and it would be titled in her
name and in my name. When she passes,
I would inherit her half of the house. Will
I be heavily taxed on this inheritance? Can
I avoid probate? What can I do to avoid
paying the most money at that time?
: If you, your brother and mother are
owners of a bank account and own it
as joint tenants with rights of survivorship,
when any one of you dies the other two
become the joint owners of the account
automatically. The same thing is true of
the house. If the home is in your name and
your mother’s name jointly, with rights of
survivorship, if either of you dies, the other
will become the sole owner of the home
automatically.
Joint ownership of real estate is an inex-
pensive way to avoid probate, but as you
alluded to, you may encounter tax issues
down the line depending on how you set up
this arrangement. In general, we’re not fans
of parents and children owning property
together as a way to avoid probate.
A
Let’s break this down: When a parent and
a child buy a home together, the parent and
child are assumed to be equal co-owners of
the home. If the home’s purchase price is
$100,000, the parent and the child are each
assumed to have paid $50,000 for their share
of the home. When the parent dies, the child
inherits the parent’s share of the home at the
home’s value at or around the time of the
parent’s death. Let’s say the home’s value
was $300,000 at the time of the parent’s
death. That would mean the parent’s share of
the home is valued at $150,000.
For IRS purposes, if the child’s cost for his
half share was $50,000 and the parent’s share
that he inherited would be $150,000, the cost
basis of the property is now $200,000. If
the child then sells the home for $300,000,
and he wasn’t using his home as a primary
residence, he wouldn’t have a tax to pay on
the parent’s share of the home, but he’d have
a tax to pay on the profit on the sale of his
share of the home, or on the $100,000 of gain
he realizes.
If the child had inherited the home
entirely and was not a co-owner at the time
the parent died, the child would not have
this tax problem. This is what is generally
referred to as inheriting a home at a stepped
up basis, meaning the child would inherit the
home at the home’s value at the time of the
parent’s death.
Depending on the estate, the value of the
home, and other assets, it could be preferable to
put the home in a living trust. The trust would
own the home. The parent would be the trustee
under the trust and the beneficiary under the
trust as well. In essence, the parent would own
the home as if it was in the parent’s name alone.
The difference would be that when the parent
dies, the document would spell out that the
child would become the successor trustee and
the successor beneficiary. Without needing
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to go through probate, the home would pass
from parent to child without the tax issues we
described above.
This is how it works in 2017. We don’t
know what, if any, tax law changes may
come down in the future, but having a trust
would likely solve the issue about taxes owed
and would allow you to avoid probate. Some
attorneys will prepare living trust docu-
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