COMMON QUESTIONS ABOUT JOINT TENANCY
This newsletter was prepared to answer many common questions asked by clients regarding transferring property to another in joint tenancy. We appreciate your taking the time to read it. If it raises new questions, please make a note of them and we will answer them at your conference.
TRANSFERRING PROPERTY TO A SPOUSE:
Q. I just got married, and I own some real property. Should I transfer my real property to my spouse?
A. If you own a separate homestead and your spouse does not, you can transfer your property to your spouse with little problems. There are several factors to consider prior to transferring a homestead or other real property to a new spouse, however.
Q. What are the tax consequences of transferring my property to my spouse?
A. The transfer from you to your spouse is exempt from capital gains tax. If you transfer your property to your spouse, your spouse’s basis in the property (the amount paid for the property, minus capital improvements) will be one-half the value of the property on the date of transfer. This will result in an increased basis, which may be a tax benefit for you. However, if you are older, you may want to consider keeping the property in your own name and dealing with transfer upon your death. See “Should I transfer my real property to my beneficiaries before death?” infra.
Q. What are the real estate tax consequences of the transfer?
A. If it is clear from the deed that you and your spouse are husband and wife, your Save-Our-Homes cap and homestead exemption will be unaffected.
Q. What is the cost of transferring my real property to my spouse?
A. If you own your house outright and owe no mortgage, the costs of the transfer are the cost of preparation of the deed, the recording costs, and minimal documentary stamp tax. The recording costs are $10.00 for the first page and $8.50 for any page thereafter. Minimal documentary stamp tax is $.70. If you have a mortgage on your property, however, the documentary stamp tax will be $.70 per $100 on one-half of the mortgage value. For example, if you owe $100,000.00 on your mortgage and transfer the property to your spouse, the documentary stamp tax will be $350.
Q. Are there any other considerations that I need to know?
A. There are several issues that arise in these situations.
First, if you get divorced, your transfer to your spouse will be considered a gift, and you may have to pay one-half of the value of your house to your spouse to keep it.
Second, if you have children from another marriage, they will not have any interest in the house upon your death because the property will become your spouse’s upon your death.
Third, if your spouse has liens or judgments against him or her, those liens or judgments may attach to the property, resulting in unwanted consequences.
Fourth, if you have a mortgage, you may be required by your documents to get approval prior to adding your spouse as an owner.
TRANSFERRING PROPERTY TO BENEFICIARIES PRIOR TO DEATH:
Q. Should I transfer my real property to my beneficiaries before death?
A. This depends upon several factors: Is the property your homestead? Is the property mortgaged? Do the tax consequences of transfer outweigh the benefit of avoiding probate? Do your beneficiaries have liens or judgments against them?
Q. How should I transfer my real property to my beneficiaries before death?
A. The most common way to transfer property to beneficiaries before death is by creating a joint tenancy with right of survivorship in the property. This is done by executing a deed from you to your beneficiaries and yourself and including the phrase, “as joint tenants with right of survivorship and not as tenants in common.” This language allows the automatic transfer of an interest in property upon any of the parties’ deaths to the survivors.
Q. What are the benefits of transferring my real property before death?
A. The only benefit to transferring your property as expressed above is to avoid probate of the property.
Q. What are the income tax consequences of transferring my real property before death?
A. If you transfer your property prior to death, your beneficiaries may be liable for increased capital gains tax upon the sale of the property. This is because when the property is transferred prior to death, their interest in the property vests as of the moment of transfer, and their basis in their percentage of the property (the amount paid for the property, minus capital improvements) will be the value of their percentage of the property as of the date of the transfer. This means that your beneficiaries may end up paying increased capital gains tax upon the sale of the property. If you have one beneficiary, this means that your beneficiary may pay increased capital gains tax on one-half the sales price of the property!
On the other hand, if the property passes through probate to your beneficiaries, your beneficiaries receive the property on a “stepped up” basis, which means their basis in the property is the value of the property upon your death. If the property is sold close to the time of your death, this means that your beneficiaries may not be liable for any capital gains tax.
Q. What is the cost of transferring my real property to my beneficiary?
A. If you have no mortgage on your property, the cost of the transfer is the cost of the preparation of the deed, recording costs, and minimal documentary stamp tax. The recording cost is $10.00 for the first page and $8.50 for any other pages. Minimal documentary stamp tax is $.70. If you have a mortgage, however, you are obligated to pay documentary stamp taxes on the portion of the property you are conveying. The rate of the documentary stamp tax is $.70 per $100.00 in value. This means that if you convey your property with a $100,000.00 mortgage to two beneficiaries, the documentary stamp tax would be $469.00.
Q. How will transferring my property affect my real estate taxes?
A. If the property you are transferring is not homestead, your real estate taxes are unaffected. However, if your property is homesteaded, there may be serious consequences.
If your beneficiaries are living with you and file for a homestead exemption, your Save-Our-Homes value increases to the current value of the property. If your beneficiaries are not living with you and do not file for a homestead exemption, most likely your Save-Our -Homes cap will be unaffected.
If the property is incorrectly transferred by not including “joint tenants with right of survivorship” on the deed, the assumption is that the property is owned by you and your beneficiaries in percentages. This percentage would be applied to your Homestead exemption and reduce it. For example, if you conveyed your property to yourself and two beneficiaries without the proper wording, your homestead exemption would be reduced to 1/3 of its current amount.
Q. What happens if I want to disinherit a beneficiary after the deed is recorded?
A. After the deed is recorded conveying the property to you and your beneficiaries, you lose the ability to change those beneficiaries. The beneficiary you want to disinherit would be required to sign a deed over to you, which is something you probably would not want to do!
Q. I’m over 62 years of age. Are there any special considerations of which I need to be aware?
A. If you are over 62 years of age, you qualify for certain programs that younger people do not. You would lose the ability to get help from those programs, including the ability to obtain a reverse mortgage on the real property. A reverse mortgage gives you cash for the equity in your house and is not to be repaid until your death or upon transfer of the property. A reverse mortgage could be highly beneficial to you to supplement your income now or later in your life.
Q. What are some other considerations I need to know about this type of transfer?
A. There are several things to take into consideration prior to executing a deed to yourself and your beneficiaries as joint tenants beyond the specific topics addressed above.
First, if you are considering transferring assets to only one beneficiary and you have more than one beneficiary named in your will, you are creating a potential conflict between your beneficiaries. You give that person on your deed complete control of the property, without any input from the additional beneficiaries. You may have the utmost in faith in the person, but you cannot control what happens with the property after your death if you convey it to another.
Second, if you need to sell your home for any reason, you cannot transfer the property, or enter into a contract to sell the property, without the consent of your beneficiaries. This may be burdensome if your beneficiaries do not live locally and may increase your closing costs due to the additional work needed to accomplish the closing. Further, the beneficiaries could refuse to cooperate in a sale of the property, resulting in costly litigation.
Third, if one of your beneficiaries has liens or judgments against them, those liens or judgments may attach to your property. If you or your beneficiaries sell the property, these judgments or liens must be satisfied before transfer of the property to a new owner.
Lastly, there is no change in potential estate tax liability if you own property in your own name or if it transfers to your beneficiaries via joint tenancy. If you have an estate large enough to be subject to estate tax ($2,000,000.00 or larger in 2008), there are other estate planning vehicles that would be more beneficial to you than transferring your property via joint tenancy.
There may be other concerns that are not specifically addressed in this newsletter. Please contact an attorney for further information.
GENERAL INFORMATION:
Q. What Are the Charges for Our Services?
A. Because each situation is unique, we are unable to quote a fee for our services until we have had an opportunity to speak with you personally. After a brief consultation we will be glad to give you a very clear estimate at fees. it you decide not to go ahead with the preparation of documents or further planning, we will waive our fees for this initial interview.
Q. What Can I Do to Prepare for my Appointment with an Attorney?
A. You can make a copy of your current deed and gather information regarding your assets and beneficiaries so that your attorney can advise you as to whether transferring your property into joint tenancy is the best option for you.
This newsletter is designed to provide informative material of interest to our readers. Readers should not take or omit any action based solely on the basis of this newsletter as isolated circumstances may require action different from that described in this general orientation document. Appropriate legal advice or other expert assistance should be sought from a competent professional.