3 Reasons Not to Add Children To Title of Your Home as Joint Tenants

Why Do People Do Add Their Children To Their Home As A Joint Tenant? 

In order to avoid court proceedings after death to change title from the parents to children, you usually do one of two things:

  1. Add Child to the Property Title as Joint Tenants
  2. Form a Living Trust

So, I get the question of why should I spend money on a living trust, when I can just add my child’s name on the property as a Joint Tenant? Joint Tenancy avoids court proceedings and transfers title to the survivors listed on the title.

Should you put your children’s name as a joint tenant on your home or property?

The answer is simple – No!

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There are multiple reasons why you should ever add an inheritor as a joint tenant.

#1 Reason – Taxes

The first reason is because of the capital gains tax. Every time you sell the property you will have to likely pay capital gains taxes. The government wants to see how much richer you have become since the time you bought your house.

For example, if you bought a home for $100,000 and then, 20 years later, sell it for $500,000, you have a $400,00 gain. The government wants a 20% (usually) capital gains tax rate on the  $400,000 gain. That can be a huge sum of money. At 20%, the tax would be $80,000!

The Step-Up in Basis

There is a FREE bonus from the government called the Step-up in Basis or Stepped-Up Basis. The government doesn’t give out many bonuses, but this is one of them. This is an amazing opportunity for you and your family. Take advantage!

If you pass away, without selling the property like in the example above and then you give it to your children, or your inheritors, you could take advantage of something called a step-up in basis.  

Here is how it works. Remember the capital gains problem we had above? Well, if you held the property instead of selling it, upon death, the $100,000 basis rises to $500,000 or the date of death value.

So, if your children sell the property right after you pass away, you have eliminated all of those capital gains taxes. You have just saved $80,000!

No Full Step-Up in Basis in Joint Tenancy

You lose the full step-up in basis when you pass property to your loved ones through Joint Tenancy. In Joint Tenancy, you will leave the property to the inheritor just like you intended. Then, if that child wants to sell, there will be a huge capital gains tax waiting for him.  This capital gains tax could have been completely avoided had you done proper estate planning.

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#2 Reason – Exposure to Lawsuits and Creditors

When you add someone as a joint tenant, you are effectively making them your partner.  That means if there is a lawsuit against them or they owe money to someone, that creditor can now take your home.

Did you intend to do that? Both people are subject to creditors of the other since there is absolutely no protection against that happening.

#3 Reason – No Court Protection After Death of First Joint Tenant

The next reason if you own your home with your son, for example, and you pass away. The property will be owned by your son. However, the property will be subject to a court process called Probate, which is expensive and time-consuming.

Had you owned the property in trust, and created the proper trusts for your children, this problem is completely avoided.

There is a similar problem is your child dies before you. Again, when you pass away there is no instruction of where that property will go, and it will end up in Court, passing by California law.

Don’t let these mistakes happen to your family. Discover what your family needs by signing up for a strategy session today, by clicking this link.