Joint tenancy vs. probate

Publication Date: Friday Dec 8, 2000

Joint tenancy vs. probate

Adding a child to joint tenancy raises issues with the IRS

by Harold A. Justman

Q When my husband died, I acquired full title to our house without a probate proceeding because we held title as joint tenants. Should I put my daughter on title to my home as a joint tenant in order to avoid probate again?

A Putting your daughter on title to your home as a joint tenant raises issues other than avoiding probate. While a joint tenancy between you and your daughter would avoid probate, it would also constitute a completed gift. In California a joint tenant may sever the joint tenancy and take his or her interest free of the rights of the other joint tenant without the consent of the other joint tenant. Accordingly, the IRS takes the position that when a joint tenancy is created, a gift is completed at the same time. Therefore, you must consider whether or not a gift tax is due. You should consult your personal attorney for more details on joint tenancy as an estate planning tool.

Q The prospect of estate tax repeal and reform has left me confused as to what to do. What do you suggest as an estate plan now?

A Estate planners prefer that their clients give away as much property as they can afford to, or can stand to surrender control over, during their lifetime. Regardless of what happens to the estate tax laws in the next year, you should use your $10,000 annual gift exclusion to move funds to your children. By using your annual gift exclusion, you won't incur taxes and you will reduce your estate as well. Remember that you can give $10,000 a year to each child. If you are married, you and your spouse can give $20,000 a year to each child.

Q We want to make gifts to our children to reduce the size of our estate. We can't afford to give them full title to our vacation home because its value exceeds the combined annual gift exclusions. Should we borrow against the home and give them cash?

A Giving is a more powerful tool in reducing estate taxes if you give appreciating assets like real estate rather than cash. If you can't give your children full title to the home, consider giving them a partial interest in the home. Because partial interests in real estate are generally discounted in value, you can give a bigger percentage of the home to your children than a pro rata share of the home's fair market value would indicate. Moreover, once the children are on title, your remaining interest in the home is also discounted because you hold a partial interest in the home instead of full legal title. However, once your children are on title to the vacation home, they should use the home regularly to prevent the IRS from claiming that there was no completed gift. Please consult your personal estate planner for the details.

Q My neighbor has allowed me to use a portion of his backyard, which is next to my garage, as a storage area. We decided to build a tool shed that we could share. I am paying to build the shed. My neighbor paid an attorney to draft an easement agreement regarding our shared use of the area. Can I buy title insurance for the easement?

A Title insurance companies will insure easements. However, the amount of insurance is generally limited to a minimal amount. The title insurance company may want to limit your policy limits to the cost of building the tool shed. A bigger issue in obtaining title insurance for easements is the consent of any existing lien holders. For example, if your neighbor has a mortgage on his property, your tool-shed easement would be junior to the mortgage. That is, if your neighbor's lender foreclosed, your easement would be wiped out by the foreclosure sale. Generally lenders will consent to an easement so that it survives a foreclosure. However, as you can imagine, it takes a lot of time to obtain the lender's consent to an easement.

Harold Justman has lived in Palo Alto since 1964. He has specialized in real estate law for more than 20 years and is often asked to lecture on real estate law to attorneys and real estate brokers. Send questions to Justman care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302. 

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