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Plan Joint Tenancy for Ideal Estate

January 23, 1994|CARLA LAZZARESCHI

Q: When my husband died, I had our jointly held stock put in my name and my sister's. Then, when she died, I had the stock that she willed me, plus the other shares that we jointly held, put in my name and that of my niece. My niece and I hold these shares as joint tenants to avoid probate. Upon my death, how will those shares be valued? -- L.N.K .

A: Because your niece apparently contributed nothing toward the purchase of the stock, all the shares will be valued as of your date of death and included in your estate for the purpose of determining what, if any, estate taxes are due.

That said, this subject--which is among the most popular in this column--deserves additional amplification.

The goal of most estate planning efforts is to minimize both estate taxes and income taxes due upon the sale of the estate by its heirs. Avoiding probate is often another major objective. For many, the perfect estate planning arrangement would accomplish all three. When an estate has a value of less than $600,000, joint tenancy vesting of assets with an heir or heirs can achieve this.

One of the principal virtues of putting assets in joint tenancy is that it allows heirs to bypass the probating of a deceased's will. Property simply passes to the other joint tenant or tenants without the hassle and expense of the probate process. Further, when an estate is worth less than $600,000 and no estate taxes are due, joint tenancy allows heirs to escape income taxes on potentially all of the profits they realize upon the sale of the assets. In essence, you can have your cake and eat it, too.

Why? Federal tax code requires the entire joint tenancy property to be included in a deceased's estate if one or more of the parties to the vesting acquired his or her interest for less than its full value. This means that if you make your niece a joint tenant on your stock certificates, the shares are included in your estate for the purpose of computing possible estate taxes. This is also true if mom or dad puts the kids on the deed to their home as joint tenants.

But now what happens? For estates of less than $600,000 in value, there is no estate tax. Still, any property included in an estate tax computation--whether or not taxes are eventually paid--is treated to a full step-up in its value to that of the deceased's date of death.

This is especially welcome news for the heirs. When they sell the property, its tax basis is the asset's value as of the donor's death, greatly minimizing their potential income tax responsibility.

On the surface, it would appear that joint tenancy between a donor and his or her heirs is a terrific estate planning tool, especially for taxpayers with estates of less than $600,000 in value. However, our experts caution against rushing to that conclusion.

One significant problem with joint tenancies is that they are irrevocable.

If the parties have a falling out, the heirs are still joint tenants with the donor. Further, joint tenancy exposes all parties to the debts and obligations of the others. If your child, whom you made the joint tenant on your home, is sued, you could lose your home. The same would apply to the stock you now jointly own with your niece.

These are the major reasons that attorneys and accountants often advise clients to consider living trusts as a means of both bypassing probate and ensuring a full step up in the property's value. But, unlike filing a joint tenancy record with the county, which essentially costs nothing, having a living trust drafted by an attorney will cost at least $2,000.

Qualifying for Widow's Benefits

Q: I began drawing social security benefits at age 65. My wife began taking her own benefits at age 62. This is the second marriage for both of us.

When I die, will my wife be entitled to full widow's benefits? For her to qualify, how long must we have been married? -- M.J.N .

A: If your wife is at least age 65 when you die, she will be entitled to receive full widow's benefits if at that time you have been married a minimum of nine months. However, that minimum period is waived if the spouse's death is accidental.

The requirement is also waived if the surviving spouse and the deceased were the parents of a minor child. The fact that you and your wife have been married previously changes nothing.

Tax Benefits of Home Sale Exclusion


Q: What is the approximate tax saving from using all of the $125,000 exclusion of home sale profits available to home sellers over age 55?

Are you allowed use the exclusion if the home you sell has been a rental for two years before the sale? --G.D.


A: The benefits of using the $125,000 exclusion will depend on your tax bracket. However, assuming a 28% capital gains tax levy, excluding $125,000 from taxation yields a $35,000 federal tax saving. When the maximum California tax rate of 11% is added, bringing the total tax rate to 39%, the saving generated by the exclusion jumps to $48,750.

In order to qualify for the exclusion, a taxpayer must be at least age 55 and have owned and made the house his principal residence for three of the last five years.

So, you may rent the home for two years before the sale and still qualify for the exclusion--but be sure it's just for two years! Exceeding that limit will knock you out of strict compliance with the terms of the law.

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