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In order to avoid probate, you may decide to either place your home in a revocable trust or place someone you trust on the deed, creating joint ownership. Each of these options have their own pros and cons, but which is a better safeguard?
If you add someone—your child, for example—as a joint tenant on your house, you will each have an equal ownership interest in the property. In the case that one tenant dies, the other will own the entire property. In this case, if you pass, your child will receive the home and your interest will cease to exist, thus probate will be avoided.
A disadvantage of joint tenancy, however, is that creditors can come after the tenant’s property to satisfy a debt. For example, if your child defaults on college loan payments, the creditor can sue in a “patrician proceeding” to have the property interests divided and the property sold, even with your objection.
Capital gains should also be taken into consideration when deciding to create joint tenancy. When you give property to a child, the tax basis is the same price as what you originally purchased the property for. However, if that same property was instead inherited, it would receive a “step up” in bases. This means the basis is the current value of the property, not the price at which it was purchased. Upon your passing, when your child inherits the other half of the home, that half will receive a “step up.” However, the tax basis of the other half that was gifted at an earlier time will remain the original purchase price. If your child decides to sell the house after you die, they will have to pay capital gains taxes on the difference between the tax basis and the selling price. The only way to avoid this tax would be if your child were to live in the house for at least two years before selling it. In that case, up to $250,000 ($500,000 for a couple) of capital gains can be excludes from taxes.
If you were to put your property in a revocable trust with yourself as a beneficiary and your child as a beneficiary, then once you die, the property will pass to the child without going through probate. Many choose this option since the trust can guarantee the beneficiary the right to live in the house. The trust will also take into account changes in circumstances, such as your child passing away before you.
Another advantage of putting your house in a trust is in regard to capital gains taxes. When you die, the tax basis of property in a revocable trust is stepped up. This means that the basis would be the current value of the property. In this case, if your child decides to sell the house shortly after inheriting it, the value of the property would likely not have changed much and therefore, the capital gains taxes would be low. Generally speaking, a trust provides more flexibility and options to protect you and your child.
To discuss which option would be best for you and your specific situation, contact an estate planning attorney today!
Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530