For Smaller Estates, Joint Tenancy Enables Heirs to Bypass Probate, Minimize Taxes

Q I know that property held jointly between a parent and child passes to the heirs without going through the probate process.

However, I don’t understand how this affects whether the property is given a step-up in value to that of the deceased’s date of death. Also I don’t know how putting your child’s name on a property and holding it in joint tenancy affects the gift tax issue.

--R.W.

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A The goal of most estate-planning efforts is to minimize both estate taxes and income taxes due upon the heirs’ sale of the estate. Avoiding probate is often another major objective. For many, the perfect estate-planning arrangement would accomplish all three. When an estate has a value of less than $600,000, joint-tenancy vesting of a home between a parent and his or her adult children or other heirs can achieve this. (When estates are worth more than $600,000, estate tax avoidance or minimizing schemes becomes more complicated, requiring more sophisticated arrangements that are best secured from a professional.)

When an estate is smaller, joint tenancy between parent and child should be considered as an option. One of the principal virtues of putting assets in joint tenancy is that it allows heirs to bypass the probating of the will. Property simply passes to the other joint tenant or tenants without the hassle and expense of the probate process. Further, when an estate is worth less than $600,000 and no estate tax is due, joint tenancy may allow heirs to escape income taxes on all the profits they realize from selling the property. In essence, you can have your cake and eat it too.

Why? Alex Fried, an Encino estate-planning attorney, explains that the federal tax code requires the entire joint-tenancy property to be included in a deceased’s estate if the other party to the vesting acquired the interest for no consideration. This means that when Mom or Dad put the kids on the deed as joint tenants, because the kids paid nothing toward the purchase or maintenance of the home, the home is included in the parents’ estate for the purposes of computing estate taxes.

Now what happens? In estates of less than $600,000 in value, there is no estate tax. Still, any property included in an estate tax computation--whether or not taxes are eventually paid--is treated to a full step-up in its basis to its value on the deceased’s date of death. This is especially welcome news for the heirs. When they sell the property, the tax basis is the home’s value as of the parent’s death, so their potential income tax responsibility is minimized.

How does this affect the gift tax issue? If half the house’s value is within the $600,000 exemption permitted under the lifetime gift allowance, the gift of half the home is covered by the exemption, and there is no issue. However, the donor must file a gift tax return for the year in which the name of the child is added to the deed. Even though no tax is due, the donor must notify the government that the gift has been made.

On the surface, it would appear that joint tenancy between parent and child is a terrific estate-planning tool, especially for parents with estates worth less than $600,000. However, don’t rush to that judgment. One significant problem with joint tenancies between parent and child is that they are irrevocable. If the parties have a falling-out, the kids are still on the deed. Further, joint tenancy exposes all parties to the debts and obligations of the others. If the child you made the joint tenant on your home is successfully sued, you could be forced to sell your home.

These are the major reasons that Fried and other attorneys and accountants often advise clients to consider living trusts as a means of both bypassing probate and ensuring a full step-up in the property’s value. There is a difference in cost, however. Filing a joint tenancy record with the county essentially costs nothing; having an attorney draft a living trust will cost a minimum of $1,000.

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Q I am trying to become a more knowledgeable investor. Is there some place or some resource to which I can turn to get trained in how to read and understand an annual report?

--R.R.A.

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A There are several sources.

The New York Stock Exchange offers information on investing and financial report reading on its Internet home page. Go to https://www.nyse.com and look for an article titled “You and the Investment World.”

The National Assn. of Investors Corp. also offers a variety of investment advice to members. Group members are entitled to buy nearly two dozen investment guides at a discount. For information about joining, write to the National Assn. of Investors Corp., 711 W. 13 Mile, Madison Heights, MI 48071.

The American Assn. of Individual Investors gives its members a subscription to its investment journal, a periodical that routinely includes tips on investing and discussions of investment strategies. Upon joining, members are sent a copy of the “Individual Investors’ Guide to No-Load Mutual Funds.” To join, send $49 to the American Assn. of Individual Investors, 625 N. Michigan Ave., Suite 1900, Chicago, IL 60611.

Other books that should be available in a library or bookstore are “Keys to Reading an Annual Report” by George Friedlob and Ralph Welton, and Dun & Bradstreet’s “Guide to Your Investments.”

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com