Joint Property with Someone Else

The basic rule that the property passes automatically to the surviving joint tenant is the same whether your joint tenant is your spouse or someone else. However, the income tax cost-basis rules are different, as noted in the previous section. For persons who are not your spouse, the surviving joint tenant gets an increase in cost basis equal to the percentage of contribution to the acquisition cost of the property made by the person who just died.

You need to analyze the cost basis of the property that will be acquired by your surviving joint tenants. The cost basis rules for spouses who are joint tenants are different from those for all other joint tenants. You should also calculate the federal estate tax exposure that may be created for your surviving joint tenants.

For example, assume you and your brother purchase a piece of property and put the title in your joint names. Assume the property cost $100,000. You contributed $40,000, which equals 40 percent of the purchase price. Your brother contributed $60,000 to the purchase price. When you die, the property is worth $200,000. Your brother keeps his original cost basis of $60,000, the amount he paid for the property, plus he will increase his cost basis by $80,000. The increase in your brother's cost basis is the percentage of the purchase price you contributed, 40 percent, times the value of the property when you die (40% × $200,000 = $80,000). Your brother's new cost basis is $60,000 + $80,000 = $140,000. If your brother sells the property for $210,000 after you are gone, your brother will have a $70,000 gain ($210,000 selling price minus his cost basis of $140,000).

This rule can work very nicely when parents place property in joint name with their children and pay for the entire purchase price. For example, assume you place the same property worth $100,000 in joint name with your daughter. You pay the entire purchase price of $100,000. When you die, the property is worth $200,000. Your daughter will receive the property automatically because she is the surviving joint tenant. Because your daughter contributed nothing toward the purchase price of the property, she gets a 100 percent step-up in cost basis. This result occurs because the surviving joint tenant who is not a spouse increases her basis equal to the percentage contributed to the purchase of the property by the person who died. You contributed 100 percent; therefore your daughter gets 100 percent of the value of the property at the date of your death as her new cost basis. If the property is worth $200,000 when you die, her new cost basis is $200,000.

Is it a good plan to place property in joint name with your children?

It can be. The child will receive the property automatically as the surviving joint tenant. The child also gets a full increase in cost basis (assuming the child contributed nothing to the acquisition).

But remember, when you place property in joint name with someone other than your spouse, you are making an irrevocable gift to that individual.

Unmarried Partners

Today there are many relationships in which a couple is not married. These unmarried partners do not have the gift and tax advantages that married couples enjoy. For example, married couples can make unlimited gifts to one another during their lifetimes. At death, their entire estate can be left to the surviving spouse without any tax under the unlimited marital deduction.

If you are not married to your partner, you need to be particularly careful in the way you title property, make gifts, or include that partner in your estate plan. If your estate is less than the $1 million gift exclusion or the unified credit in effect at the time of your death, you may be able to transfer your estate to your partner without tax. See Chapter 17 and the Glossary for more details about the unified credit.

Families may object to your leaving your estate to a partner instead of to them. And, if you and your partner have jointly owned property and you later separate, you will need a lawyer to help undo any planning you have put into place.

Multiple Joint Tenants

You can have as many joint tenants as you want. Assume your spouse is gone, and you have two children. You decide to add the children as joint tenants on the deed to your home. Assume your home is worth $100,000 at the time you add your children's names to the deed. When you add the children's name to the deed, you have made an irrevocable gift of $33,333.33 to each child. When you die, your children will each own a 50 percent interest in your home. Then, if one of your children dies, the home will belong 100 percent to the surviving child.

This may or may not be what you want. Some parents would want the children of a child who dies to have the property. This would not happen if you add your children's names to the deed. The title to the home would automatically pass to the surviving child, even if the child who died had children.

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