YOUNGER LAW NEWS: Is It Better to Use Joint Ownership or a Revocable Trust to Pass Down a Home?

HouseWhen leaving a home to your children, you can avoid probate by using either joint ownership or a revocable trust, but which is the better method? In New Jersey, the answer is actually neither.  But there are choices.

If you add your child as a joint tenant on your house, you will each have an equal ownership interest in the property. If one joint tenant dies, his or her interest immediately ceases to exist and the other joint tenant owns the entire property. This has the advantage of avoiding probate.  However, avoiding probate in New Jersey is usually really not necessary.

A disadvantage of joint tenancy is that creditors can attach the tenant's property to satisfy a debt. So, for example, if a co-tenant defaults on debts, his or her creditors can sue in a "partition proceeding" to have the property interests divided and the property sold, even over the other owners' objections. In addition, even without an issue with a creditor, one co-owner of the property can sue to partition the property, so one owner can force another owner to move out.  Litigation, any kind of litigation, is expensive.

Joint tenancy also has a capital gains impact for the child. When you give property to a child, the tax basis for the property is the same price that you purchased the property for. However, inherited property receives a "step up" in basis, which means the basis is the current value of the property. When you die, your child inherits your half of the property, so half of the property will receive a "step up" in basis. But the tax basis of the gifted half of the property will remain the original purchase price. If your child sells the house after you die, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. The only way to avoid the tax is for the child to live in the house for at least two years before selling it. In that case, the child can exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.  This rarely happens because it is more likely than not that the child already has a house and roots in the community and no interest in relocating.

If you put your property in a revocable trust with yourself as beneficiary and your child as beneficiary after you die, the property will go to your child without going through probate. A trust is also beneficial because it can guarantee you the right to live in the house and take into account changes in circumstances, such as if your child predeceases you.

Another benefit of a trust is with capital gains taxes. The tax basis of property in a revocable trust is stepped up when you die, which means the basis would be the current value of the property. Therefore, if your child sells the property soon after inheriting it, the value of the property would likely not have changed much and the capital gains taxes would be low.

What I have said about the benefits of a trust over the creation of a joint tenancy is true.  Unlike states like Florida and California and others, which have probate procedures that take a long time, are complicated and expensive, New Jersey has probably the most consumer-friendly probate law in the country.  Consequently, living trusts here are not necessary for most people. One exception is if you own real property in a state where probate is complicated and should be avoided.  A well-drafted will, with proper trust provisions can accomplish the same result at a considerable tax saving.

However, trusts can be a beneficial way of transferring real property if your objective is asset protection planning - - protecting your house in case you require long term care in a skilled nursing home a some future time.  How this is done will be the subject of a future article, but, simply speaking, an unmarried person can transfer a residence to an irrevocable trust and retain either a life estate or the right of use and occupancy. [There are subtle differences between he two].  Upon the individual's death, the same tax benefits as stated above for the living trust apply.  If the individual enters a long term skilled nursing home, the house will be protected from creditors (including he nursing home), and the individual will qualify for Medicaid benefits when his or her oher assets have been spent down to not more than $2,000.00.  Of course, there is a catch.  The transfer to a trust does not protect the house if a Medicaid application is made within five years of the execution of the deed.  There are some situations when the retention of a life estate is a better choice than the retention of the right to use and occupy, and the rules are somewhat different if both a husband and wife want to make a transfer.  These will be discussed in the future as well.

In general, a trust is more flexible and provides more options to protect you and your child, but circumstances always vary. You should talk to your attorney about how to pass down your property.

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Questions? Contact us at Michael C. Rudolph, Esq. P.A.

Michael C. Rudolph, Esq. P.A.
154 Boonton Avenue | Kinnelon 07405
Phone: (973) 208-2900 ext. 4