Pennsylvania Estate Planning Lawyer & Attorney : Jakubik Law Firm : Serving Philadelphia, Chestnut Hill, Mt. Airy

A recent article in Black Enterprise magazine provided a pretty good primer on the various reasons for using trusts as a part of your estate plan, as well as a description of many of the more commonly used trusts. As the author of the article notes, the reasons to use trusts include:

• You have sizable assets
• You want your estate to be payable to your heirs upon their meeting certain conditions, such as graduating from college, not necessarily immediately after your death,.
  
• You have a disabled relative you would like to provide for without disqualifying that person from Medicaid or Medicare.
• You want to reduce estate and gift taxes.
• You want to protect your assets from creditors and lawsuits.
• You'd like to ensure that the principal or remainder of your estate goes to your children or other heirs after your spouse dies.
  
• You'd like to maximize estate tax exemptions for yourself and your spouse.

There are, of course, numerous other reasons to employ trusts in your planning, and no two client situations are alike. Only through carefule consultation with your attorney and finan cial advisers can you assure that the structure of your plan best meets your goals and objectives and furthers the hopes and dreams that you have for your family and for your legacy.

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A few weeks ago I wrote about ways to avoid probate, in that post I mentioned that property that is jointly owned passes outside of the probate process.  It sounds like a great way to pass your real estate to your children and save money in the process. 

Mina N. Sirkin wrote a great post over at her Law Firm Marketing & Management Systems blog covering this topic.  If you would like to read her post click here.  Basically it boils down to this; when you hold real estate in joint tenancy with someone their problems can become your problems. 

If your child has a judgment entered against them your real estate could have a lien placed on it to satisfy the judgment.  Satisfaction of that judgement could result in having to sell the home to cover the lien.  The other large problem is if you decide you want to sell your home you will need your child to consent to the home.  That issue can be compounded if the child is married, then you will need your child and your child’s spouse to agree to the sale. 

On top of the possible family strife involved the tax basis can also be an issue.  If mom and child hold real estate in a joint tenancy and mom passes away then the child will only receive a half step up in basis.  Here’s an example:  Say mom buys the property for $100,000 adds the child to the title as a joint tenant and when she passes away the fair market value of the property is $500,000.  Mom’s half of the real estate is transferred to the child and that half gets the step up in basis ($250,000) and now the child holds the real estate all by herself.  The child’s half still has the basis it started with, $50,000, and added to that is the half that got the step up in basis, $250,000, for a total basis of $300,000.  So now if the child sells the property for fair market value of $500,000 she would have a taxable gain of $200,000.  (Sale price $500,000 minus basis $300,000 = $200,000 taxable gain)

Contrast that with what would have happened had mom held the property all by herself and then the child inherited the property from mom after she passed.  The child would receive the property with a stepped up basis equal to fair market value, $500,000.  Now when she goes to sell the property she would not have any taxable gain.  (Sale price $500,000 minus basis of $500,000 = $0 taxable gain)

The moral of the story is that you should carefully consider the pros and cons of holding real estate in joint tenancy.  The legal and tax ramifications can be severe.  Proceed with caution!

Source: Minnesota Estate Planning Blog

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