Beware the do-it-yourself “simple,” “efficient” estate plan. While simplicity and efficiency are valid objectives, it is important not to create unnecessary risk just so that you can save a few dollars in the short term.
One risk that many people take is adding a co-owner to their real property trying to simplify the transfer upon their death. While often relatively fast and easy, this method potentially exposes both them and their loved one to avoidable risk.
What is Joint Tenancy?
When property owners say they want to “add someone” to the deed of their real property in order to create an easy method of passing the property, they often mean that they wish to create a joint tenancy with that other person. In many cases, this process occurs without a hitch. The original owner dies, and the person “added” takes over as the new sole owner of the property.
What Are the Risks of Joint Tenancy of Real Property?
However, creating a joint tenancy of real property as an estate planning tool has many potentially negative ramifications, especially if the property is your home. This method is a completed transfer under the law, and that carries multiple consequences, including:
- Capital Gains Taxes: Taking ownership through this method, instead of inheriting the property, may cost the loved one a sizable portion of the potential “stepped-up basis” in the property. When he/she sells the property, he/she will owe capital gains taxes. Those could have been completely avoided if the property had been inherited.
- Estate, Gift & IncomeTaxes: Also, if a person “adds” a loved one, and he/she pays nothing, that is a gift. That can have certain impacts when it comes to estate and gift taxes, as well as income taxes for your loved one. Furthermore, if the gift giver needs to apply for Medicaid in the future, this gift may make them ineligible to receive Medicaid benefits for a period of several years, even if they are otherwise poor enough to qualify. As they say, “no good deed goes unpunished.”
- Owners Have Right to Sell: Beware that if you “add” someone, that person is a co-owner and has all the legal rights and obligations that you have. They can sell their share or mortgage your house, and if your loved one gets sued successfully, his/her creditors could go after the property.
- Financial Exposure & Risks: If the co-owner declares bankruptcy, the property may need to be sold to pay their creditors. Or, if the owner fails to pay income taxes the IRS can issue a lien on the property. The house could also be at risk if either owner faces a judgment or other financial problems.
What Are My Options for Transferring Ownership of Real Estate?
Fortunately, Wisconsin law allows many other, less risky options for efficiently transferring ownership in real estate. You can create a “transfer on death deed”, which only completes the transfer of your property upon your death, and does not give your loved one a present ownership interest; it also avoids tax and creditor risks. Also, you can create a living trust and fund the property into it, again avoiding many of the risks of creating a joint tenancy and adding many benefits that TOD deeds do not offer.
Questions About Estate Planning?
To start a discussion with one of our experienced estate planning attorneys, we invite you to request a consultation. The attorneys at Estate Law Partners, LLC, assist clients with a variety of estate planning matters, including wills, trusts, powers of attorney, health care documents, and a host of other estate planning tools.
Request your consultation today.