Joint Tenancy’s Good Intentions Can Result in Grave Consequences

Question: I am a widow and I would like to know if it is advisable to add my two adult children to my house deed. One is single, the other married.

Answer: When you add someone to your home deed as a joint tenant, you’re making a gift. And that can cause tax and legal problems.

Many people like the idea of joint tenancy because holding title to property that way avoids probate, the court process that follows death. At your demise, your home would be transferred without much cost or delay to your children. (If your estate owes estate taxes, those still would have to be paid--avoiding probate is not the same thing as avoiding taxes.)

Unfortunately, your generosity may have consequences. The IRS says that creating a joint tenancy on a home or most other property (except for bank accounts) means that you’re making a gift. If the other person isn’t your spouse, that gift may be taxable.

You would need to file a gift tax return if the share you’re transferring to your children is worth more than $10,000 per person (which it almost certainly is). If the gift is large enough, you could owe gift taxes. (Chat with your tax advisor about details.)

Even worse, your home could be at risk if your children get sued or go broke. Their creditors could come after your share of the home.

Then again, your children could be the ones creating future problems. See what the next letter writer has to say about the potential dangers of joint tenancy.

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Question: My elderly father-in-law has gotten himself into a bad fix regarding joint tenancy. Several years ago, he and his wife added my nephew as a joint tenant on their house, reportedly because the nephew cared for my mother-in-law after she had a serious operation. My mother-in-law has died, and my father-in-law wants to sell his share and move in with us. But the nephew refuses to sell and is making plans for the house and land. Does my father-in-law have any right to sell any or all of his property? Is there any solution to this mess?

Answer: Your father-in-law is indeed in a mess, and he needs to hire an attorney pronto. He probably can force a sale of the house, but he probably will have to share the proceeds with the presumptuous nephew.

Your father-in-law could just as easily have been in the opposite position: wanting to stay in his home but forced to sell by the nephew. The nephew also could legally sell his interest in the house to a complete stranger, if you can imagine that.

All this could have been avoided had your in-laws created a living trust and named the nephew as a beneficiary after they both died. Putting the home in a living trust would avoid probate but also would allow the trust creators (your in-laws) to stay in control of their property. That includes being able to change beneficiaries when the nephew showed his true colors.

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Question: My daughter goes to an expensive college. I want to take a distribution from my IRA to pay her $35,000 tuition for this year. I know that although I’m too young to qualify for a retirement distribution (I’m 53), I can avoid the 10% early withdrawal penalty because I’m using the money for college tuition. But after I pay the income taxes on the distribution, I will not have $35,000. Can I take a distribution for a larger amount so that the after-tax amount is $35,000 and still not pay the 10% penalty? I understand that in any case, it may not be wise for me to take the money out of the IRA. But I need to.

Answer: Why, exactly, do you “need” to jeopardize your retirement? Are you counting on darling daughter to take care of you in your old age? Might want to rethink that, Daddy-O--or shall we say, Daddy Uh-Oh.

To avoid the 10% federal early withdrawal penalty, all of the money you withdraw from your IRA must be used for qualified higher education expenses. If you take out more to pay the taxes, you’ll have to pay both taxes and the penalty on the amount that exceeds the college expenses.

Say, for example, you’re in the 28% federal tax bracket (we’ll leave out state taxes for simplicity’s sake). You would need to withdraw $48,611 to have $35,000 after taxes. But you also would owe $1,361 in penalties--10% of the amount that exceeds her $35,000 education costs.

That’s not the worst of it. If the money isn’t withdrawn from your IRA, it could grow to more than $150,000 by the time you’re 65, assuming 10% annual returns. If you have to work until age 70--and at this rate, that seems likely--the money could have grown to nearly $250,000. I’m sure you’ll agree that’s a pretty expensive way to pay for a single year of college.

You and your daughter probably have other options, including student loans, a home equity loan or--imagine!--a less expensive school. Trashing your retirement to give your daughter an education you can’t afford is doing neither one of you a favor.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.