When developing estate plans for clients with property of a capital nature (real estate, marketable securities being a couple of examples), one of the questions I get asked more often than not is: How can I avoid probate? Can I just put someone else’s name on a document so it transfers to that person when I pass away? Are there any implications?
Technically speaking, “putting someone else’s name on a document so it transfers to that person when I pass away” is called “Joint tenancy with right of survivorship” (“JTWROS”). It is one of the most common ways to avoid probate. The ins and outs, and pros and cons of JTRWOS have been discussed in the ‘all about estates” blog in detail at various times during the past few years. Nevertheless, because it is a subject that comes up so often, I wanted to revisit some of the basics as a reminder that while it is a good strategy, it must be implemented properly with eyes wide open to intended and sometimes unintended consequences.
JTWROS can be applied to most capital property (or assets). The assets in question can be held between individuals (not just spouses). To deal with some legal and tax issues separately, JTWROS planning could involve separating legal from beneficial title to the property, and if done properly achieve probate avoidance.
Strategies regarding the title transfer of a beneficial interest as part of a plan to avoid probate include:
– A parent can immediately gift a beneficial interest to child, creating an immediate disposition for tax purposes in the hands of the parent. This might trigger a capital gain on the interest given away by parent. The parent and child must report the income and gains related to the property based on their proportional interest going forward.
– No immediate transfer of beneficial interest to child, but the intention is to pass beneficial interest to child upon parent’s death by survivorship. The child gets the beneficial asset on death of parent outright. The parent continues to report all income and gains during lifetime and upon death. The parent should document their intention was not to create a trust as a result.
– No immediate transfer of beneficial interest to child and no intention to pass beneficial interest to child upon parent’s death (child holds interest in trust for parent’s estate). The child should confirm that he/she holds his/her interest in the asset in a bare trust for the parent during the parent’s lifetime and for the estate thereafter rather than just rely on the assumption that a trust resulted from this . The parent continues to report all income and gains during lifetime and upon death.
There are potential consequences to carefully consider and evaluate when making an asset legally and beneficially owned by a parent JTWROS with an adult child:
1. Loss of control by parent (This is an issue of how much you trust your child, among other things)
2. Potential exposure to child’s creditors (similar issue as above)
3. Disputes among siblings over intentions (document, document, document)
4. Death of child before parent (not usually planned for but it happens, regrettably!)
5. Tax implications, some of which I have outlined above.