Estate Planning Problems And Solutions When Parents And Children Co-Own Property
In today’s real estate market, with prices getting higher and higher, many young people find that to get the credit they need for larger loans, they need to co-sign, and thus, co-own property with a parent. But when a parent and child both own property, there can be problems when it comes to estate planning.
The Death of a Co-Owner
One problem is what happens to the property when one of the owners dies. To transfer the half of the deceased’s property to the other, surviving owner, the probate court needs to get involved, along with the time and expense that is associated with the probate court. Not only that, but whoever inherits the decedent’s partial interest in the home or property, will now be the new co-owner, a result that the surviving owner may not want.
The probate court and these kinds of problems can be avoided, but doing so takes some advance planning.
One way to avoid probate is to have both owners of the property own it as joint tenants. With a joint tenancy, the deceased’s portion of the property automatically transfers to the surviving owner, without the need for legal action or the probate court being involved. However, if both owners (tenants) were to pass away at the same time, the property would still need to be probated.
Problems With Joint Tenancies
One problem with the joint tenancy, is that the spouse of whoever has passed away, would have no share of the deed’s ownership of the property-the deceased’s share has automatically transferred to the surviving co-owner. Once the deceased’s half automatically transfers to the surviving owner, the spouse of the deceased gets nothing.
Giving Property Back
Could the surviving owner (who now owns all of the property) give a surviving spouse a share of the home back? Once the property automatically transfers to the surviving owner, it isn’t so easy to give back a share of the property to a surviving spouse.
First, any transfer of ownership through a quit claim deed, could accelerate the mortgage. Additionally, the transfer to the surviving spouse could be seen as a gift by the IRS, triggering a gift tax penalty.
One good option may be using trusts. You can transfer your ownership of property to a revocable trust, where the trust transfers the property to a surviving owner or a surviving owner’s spouse. A party can also hold their share of property in a revocable trust, if the trust is joint with the spouse. This will avoid probate, and allow the property to go to whomever it is supposed to go to, upon the death of a co-owner.
It also may have some tax benefits, allowing a step up in basis, which tends to lower the taxable value (that is, the capital gains) of inherited property.
Another benefit is the trustee. Should a co-owner become incapacitated, the trustee can manage the incapacitated person’s interest, without court interference, and the trustee can carry out the wishes of the co-owner.
We can help you plan for real property in your estate plan. Call the Torrance wills attorneys at Samuel Ford Law today for help.