The Impact of Jointly Owned Property on Estate Planning

One of the most common estate planning tactics for married couples is the joint ownership of their assets. When one spouse passes away, the other receives all the property without having to go through the probate process. This also eliminates any potential estate taxes at the first death because federal law allows for an unlimited marital deduction.

Although this strategy certainly has its benefits, it also comes with some drawbacks. It’s important to know about those advantages and disadvantages when engaged in the estate planning process.

Jointly owned property does not preserve the applicable exclusion amount

First, relying solely on a jointly owned property for your estate plan could mean you cannot take full advantage of certain tax exclusions. When you die, you can leave a certain amount of your assets to a beneficiary other than your spouse without having to pay any federal estate taxes.

If your joint assets are worth more than the exclusion limit, you are simply deferring the estate tax your beneficiaries will have to pay by passing on all your property to your spouse. In fact, once your spouse dies, his or her estate will likely have a higher estate tax obligation than otherwise would have been necessary.

Right now, the estate tax exclusion limit is $5.49 million. Let’s say you have a joint taxable estate worth $7 million and left it all to your spouse upon your death. If your spouse then passes away, that exclusion amount still applies to your estate. This means your loved ones would be responsible for paying estate taxes on $1.51 million of the money you left them.

However, if you had taken advantage of the exclusion and left behind that $1.51 million to your beneficiaries upon your passing, the value of your estate would have dropped to the exclusion amount. Thus, when your spouse passes (assuming he or she stays at or below the exclusion), your beneficiaries would not have to worry about estate taxes.

You do not necessarily need to gift this money directly to your beneficiaries to avoid the estate tax. Instead, you could put the money into a trust, which would hold assets to allow your spouse to continue using them while shielding them from taxes for the benefit of your loved ones.

Jointly owned property does not help when it comes to a step-up in basis

Any assets distributed after you pass away benefit from a step-up in basis to reach market value. If for example, you own a home that has a market value of $1 million, that you purchased for $250,000, your heirs would receive the home at a “stepped-up” tax basis of $1 million and could sell the home without a gain on the sale.

However, if you owned the home as joint tenants, your spouse would be entitled to the entire house, but only one-half of the value of the home would receive a “stepped-up” tax basis. In our example, the home’s new basis would be $625,000. Leaving a $375,000 taxable gain if the surviving spouse were to sell the home. There may be tax exclusions available to reduce the amount of that gain under certain circumstances.

And further complicating the decision is if the home were to be held as community property with a spouse, you may be eligible for a “double stepped-up” tax basis where—at the first spouse’s death—the basis is adjusted to the value on the date of the first spouse’s death. This is particularly useful when a couple has owned the property for a very long time, the value has appreciated over the years, and selling the property may be necessary during the lifetime of the surviving spouse.

These are some of the factors you must consider before deciding to rely on jointly owned property for your estate plan. Speak with an experienced estate planning attorney to make sure you have all your bases covered.

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