Rash Move Into Joint Tenancy Can Be Reversed
Q: Several years ago, my mother added my brother and me to the deed on her home as joint tenants. The reason was simple: her attorney convinced her that because her estate is under $600,000 the move to joint tenancy would eliminate the need to probate her will. I know that joint tenancy will make my brother and me liable for a huge tax bite when we sell our mother’s home. How can I undo what appears to be an unfortunate mistake? --J.H.
A: For the benefit of everyone, let’s review why you are in the situation you are. One of the principal virtues of putting assets in joint tenancy is that it allows surviving heirs to bypass the probating of a deceased’s will. Property simply passes to the other joint tenant without the hassle and expense of the probate process. This is precisely the reason that lawyers advise joint tenancy for clients whose estate is less than the $600,000 exemption on estate taxes.
This strategy can make sense for couples living in a community property state, like California, whose estate is worth less than $600,000. In these cases, couples can take advantage of the probate-avoiding features of joint tenancy as well as the huge income tax advantages that a community property vesting brings if they note in their wills that the property was purchased with community funds. By invoking that provision, the surviving spouse is entitled to revalue all the marital assets as of the deceased spouse’s date of death. This means that upon the sale of those assets--most often this involves the sale of the family home--this potential taxable gain is significantly reduced.
However, when the joint tenancy involves anyone other than a married couple, there is a considerable downside tax consequence for the heirs. In these cases, such as yours, the surviving tenant cannot claim community property and is not entitled to revalue the entire assets as of the deceased’s date of death. Only the deceased’s half is revalued as of his or her death; the remaining half keeps its original tax basis. So, as you have correctly concluded, you will face a tax bite upon the sale of your mother’s home.
What can you do about this? More than you might think. The key to undoing the joint tenancy without further complication, say our advisers, is to return the home to your mother’s full ownership, under the argument that your mother’s original decision to put the home in joint tenancy was solely an act of convenience. You will want to argue--and we assume that this is the truth--that because you did not contribute to the purchase, upkeep or maintenance of the home, your arrangement was not a true joint tenancy and should now be undone.
This argument is not without its peril. The Internal Revenue Service could take the position that returning the home to the full ownership of your mother constitutes a gift from you that carries with it gift tax consequences for you. But you and your mother can present evidence to bolster your case such as canceled checks, tax bills, etc. When should you do this? You could wait until after your mother’s death, but our advisers think you are better off biting the bullet now while your mother is still alive and can attest in person to her original intentions.
One possible solution would be to deed back the home to your mother and then see an attorney about putting your mother’s assets in a living trust. Remember, once the joint tenancy is dissolved, you face the prospect of probating a will, which could easily run more than $4,000 on an estate of $150,000.
Adjustable Mortgage May Be Short-Term Fix
Q: I have a 30-year, fixed rate mortgage of $132,000 at 8.875% and am thinking of refinancing. Would a fixed rate or an adjustable rate be a better choice. I think I will be transferred in my job in about two years. --P.D.
A: Why refinance at all if you face a move within two years? A refinancing only makes sense if you can save money and it is questionable whether any savings you get from a lower interest rate would offset the loan fees you will be forced to pay for your new loan. The only way you can know for sure if you can save money is to get out some paper and a sharp pencil and start working the numbers.
You should note that new 30-year fixed rate mortgages are running between 7.24% and 7.5%. These loans carry points of between 1% and 2% of the mortgaged amount. Fees on a loan of $132,000 could run another $1,500 to $2,000 depending on your lender. Clearly it is going to take you a lot longer than two years to recoup the $4,500 that a new loan will cost.
But perhaps an adjustable rate mortgage with a low introductory rate and no points is worth looking at. Typically, no-point loans are not good deals for consumers who plan to stay in their homes a long time, because they come with higher interest rates than loans carrying points. However, if you plan to get out in only two years, you may find that a no-points, adjustable rate mortgage is just what you want. Rates are starting at about 4% these days. You should be careful to look for a loan that is adjusted only once a year and one that can jump a maximum of 2% each year. This way you know that 8% is the maximum rate you will face in two years.
However, before you leap, get a handle on the fees you will be charged for escrow, appraisal, and other “services” performed by the lender. First add up what the new loan will cost. Now calculate what you stand to pay under a new loan and subtract it from what you would pay if you stayed with your present mortgage. Does the difference exceed the cost of the new loan? If so, then the refinance makes sense.
Divorce Before Sale Doubles Exemption
Q: My wife and I legally separated earlier this year; we did not divorce. Later we sold our home.
Are we each entitled to a $125,000 exemption on the profits from the sale? --J.P.
A: Since the home was sold while you were still married--even though you are separated--you are entitled only to share a single $125,000 exemption. For reasons that seem to defy logic, the law gives single taxpayers a $125,000 exemption and tells married couples to share the same amount.
If you had wanted to have your own exemption, you should have divorced and then sold the home. This way you and your wife could have each had a full exemption and been able to shelter as much as $250,000 in profits from taxation.
