Each profession has its own language. Computer geeks know what a “binary digit” is, while us layman over the age of forty have no clue. When my doctor was concerned about my “lipo-profile” I told him that I knew my nose was longish, but what did that have to do with anything?
Certainly there’s no way that my background as a tax and estate attorney could lead me to speak in bewildering terms! Take a simple term like “joint ownership”. Everyone for sure knows what that means, right?
Wrong.
Did you know that there are three different ways that you can own an asset or property jointly, and each different form of joint ownership has very different economic effect and consequence to the joint owners?
The three different forms include: joint tenancy with right of survivorship; tenancy by the entirety; and tenants in common.
When you mention joint ownership, most people think that you are talking about joint tenancy with rights of survivorship. When one owns property jointly with rights of survivorship, what this means is that both owners have an interest in the property or asset, and if one of the joint tenants dies the other takes the asset by operation of law.
For example, if I put a savings account in joint ownership with rights of survivorship with one of my daughters, upon my death she takes full rights and sole ownership of the property. This is true despite anything contrary in my will, such as an intention for my wife to take my account at my death.
While joint ownership with rights of survivorship avoids the probate process, it could also circumvent my intent and cause estate and gift tax problems. Consider that if I have a bank account with $100,000 in it. I place it in joint ownership with my daughter. I just made a gift of $50,000 to her under the gift tax laws. Since I can only gift my daughter $12,000 tax free in any given calendar year, I just made a taxable gift to her that would require the filing of a gift tax return.
Compare joint tenants with rights of survivorship to tenancy by the entirety. Both types of joint ownership pass to the surviving joint owner upon the first joint owner’s death. But tenancy by the entirety may only be owned between a husband and a wife. It is considered a “unity” of interest. In other words, rather than an undivided interest in the whole, the husband and wife are considered one unit. This type of ownership may also provide asset protection features. If one of the spouses has a judgment or creditor problem, the creditor generally cannot attach a property owned as tenants by the entirety unless both the husband and the wife are liable to that same creditor.
In Florida, when real property is titled as “husband and wife” it is presumed to be owned as tenants by the entirety. Sometimes a title agent will draft a deed that confuses by reading “husband and wife joint with rights of survivorship”. If tenancy by the entirety is intended, then a corrective deed may be in order.
Finally, we turn to tenants in common. Here each joint owner has an undivided interest, but unlike joint ownership with rights of survivorship or tenancy by the entirety, each co-owner can separately sell, transfer or bequeath his interest in the property. If one of the joint owners dies, his share is subject to probate.
Often people may believe that they own property, assets or accounts jointly with rights of survivorship when in reality they own it as tenants in common. Perhaps a bank clerk filled out the form when the account was opened as tenants in common without asking or realizing the difference, or perhaps the financial institution presumes tenants in common unless the account owners direct otherwise.
In any event, if you believe that your account should not be subject to probate then you want to ensure that you do not have the account owned as tenants in common.
One final note – one should not use joint ownership as a probate avoidance technique in most circumstances. There are gift tax, estate tax and creditor issues too numerous to describe in this column. You should seek advice from competent estate planning counsel before relying on joint ownership for probate avoidance, tax planning or creditor protection.
So as you can see, something as innocuous as joint ownership can have very different effects. Take a look at your accounts, property records and deeds to ensure that how you believe you own something is really the way that your title reflects.
4 Comments
I’ve heard of something called a “ladybird” will. It allows an asset,like a house, to be given at death but the person that inherits it had no ownership in the property prior to the death of the owner. This is legal in texas. Does florida have a similar law??
I have not seen a Ladybird will in Florida. About the closest item to this would be a transfer wherein the grantor retains a life estate and transfers the remainder interest to others. Gift tax issues apply.
If two people who live together but not married own a home jointly with right of survivorship. Can one person on his deathbed quit claim his half to someone other than who he owned the home with?
In your scenario you describe a transfer of real estate that is currently owned jointly with rights of survivorship to a third party who is not one of the two joint owners. Unless both owners sign the deed, at least in Florida you have an invalid transfer. Both joint owners must sign the deed.
Now let me address a transfer signed by the parties that are necessary. Here, a deathbed quit claim is certainly legal but not prudent from a tax standpoint.
When one gifts assets during lifetime the beneficiary receives the asset at the grantor’s tax cost basis. Contrast this result to the situation where the beneficiary inherits the assets after death, when she receives a step up in tax cost basis equal to fair market value as of the date of death. This step up in tax cost basis at death, often reduces or eliminates the capital gain tax consequence. In your example above, a joint owner would receive a step-up in one half of the value of the home as of the date of death of the joint life owner.
Since a lifetime gift is a transfer possibly subject to gift tax, then there is no transfer tax advantage for a deathbed transfer. Therefore, the deathbed transfer often doesn’t make sense from a capital gains tax standpoint, although competent tax counsel should be consulted in any situation.