Pitfalls and Dangers of Joint Tenancy

Robert L. Bolick, Esq. 

 

Most real estate owned by more than one person is held as “joint tenants with rights of survivorship”. This is more or less the default setting for holding title, especially among married and unmarried couples.  Unfortunately, it is probably the worst way to hold title, for a number of reasons:

1. Probate is deferred, not avoided
2. You can lose tax benefits on appreciated property held by married couples
3. You lose the opportunity to provide asset protection for the surviving spouse
4. You lose the opportunity to provide asset protection for your heirs.
5.  You lose the opportunity to provide for children from prior marriages

 

1. Won’t Joint Tenancy Avoid Probate?

No.  It merely defers probate until the death of the second person.  There will still be a probate required upon the death of the second joint tenant.  The best way to avoid probate is to create a revocable living trust to hold title to your assets.

2. Loss of Tax Benefits for Appreciated Property Held by a Married Couple

Under Nevada law, property held in joint tenancy is deemed to be separate property owned one half by each spouse, not community property.  Community property has distinct tax advantages over separate property, most notably a step-up in basis on both halves of the community property upon the death of the first spouse.

The effect of this is that a surviving spouse can sell any appreciated community property after the death of his or her spouse and all capital gains are eliminated.  All proceeds are tax-free.  It just doesn’t get any better than that – no taxes.

It’s a completely different result for sale of property held in joint tenancy.  Only one half of the property receives a stepped-up basis.  Stated another way, only half of any capital gains are eliminated.  Half of the gain is retained.


To illustrate, if a couple held property in joint tenancy with a built-in capital gain of $100,000 and spouse #1 dies, when the survivor sells the property there is a $50,000 capital gain.  If the property were held as community property, the gain would be zero.

3. How Can You Avoid Capital Gains?


How you avoid capital gains is to hold the property as community property instead of separate property (joint tenancy).

There are two main options to have your assets be community property: (1) hold your assets in a living trust; or (2) hold title as community property with rights of survivorship (CPWROS).  NRS 111.064.

The Nevada legislature enacted this statute clear back in 1981 to afford us as Nevada residents the opportunity to have the right of survivorship feature of joint tenancy while retaining the favorable tax treatment of community property. Yet this favorable way to hold title is rarely used.

4. Loss of Asset Protection for Surviving Spouse


As stated above, the best way to avoid probate is to hold title to your assets in a living trust.  Not only will this avoid probate, but you can provide complete asset protection for the surviving spouse or surviving partner for the assets received from the deceased spouse or partner.


This can easily be done by simply creating a standard A/B Trust. The surviving spouse maintains complete control over use and benefit of the assets throughout his or her life, yet they are 100% protected.


5. Loss of Asset Protection for Your Heirs


Similar to protecting your assets for your spouse or partner, your entire estate can be held for your heirs or beneficiaries 100% protected for them throughout their lives.  This inherited property can remain their separate property regardless of whether they are married or single.  It can serve as a built-in “prenuptial” agreement maintaining all inherited assets as their separate property in case of a divorce.


Assets can further be 100% protected from any and all claims against your beneficiaries throughout their lives.


This can be very simply and easily accomplished by setting up trusts for your children or other beneficiaries within your living trust.  You lose all these opportunities for asset protection if you merely hold your properties in joint tenancy.


6. No Protections for Children from Prior Marriages


One of the real, hidden drawbacks of holding property in joint tenancy is that children from a prior marriage will likely get disinherited.


For example, suppose a couple have two children together and the wife has a child from a prior marriage.  The wife dies first.  All property held in joint tenancy automatically passes to her husband.  Upon his subsequent death, her child from her prior marriage is not one of his heirs at law and inherits exactly zero from him.


If the intent of the couple is to provide for all three children, the best way to accomplish this it to hold their property is a living trust.


7. Never Hold Property in Joint Tenancy with a Child


If joint tenancy is bad for couples, it’s much, much worse between a parent and a child.  Why?

1. Your property can be attached by any creditor of your child.
    
   If your child gets divorced, is in a car wreck, has unforeseen medical expenses, has a business failure, files bankruptcy, etc., your property can be attached by the creditors of your child.
    
2. You lose the ability to eliminate capital gains on appreciated property.

What’s bad for couples gets much worse when children are involved.  If the surviving spouse (mom or dad) holds his or her assets in a living trust, 100% of capital gains are eliminated on appreciated property. The kids can inherit all completely income tax free.

For joint tenancy between a parent and one child, half of the capital gains are retained.  When two children are on title, two thirds of the gain is retained.  For three children, three fourths of the gain is retained, etc.

Conclusion


Holding property in joint tenancy is likely the worst possible way to hold title to property. Yet, amazingly, that seems to be the standard in our community. Holding title to your property in a living trust can provide far greater protection for you and your heirs and avoid the myriad problems discussed above.

Charitable Remainder Trusts

Robert L. Bolick, Shareholder

Can a Charitable Trust Benefit Me?   

If you have charitable inclinations to benefit a charity when you pass away, but you want to retain the use and benefit of your assets during your life, a charitable remainder trust (“CRT”) may be the perfect tool for you.  You can receive a current income tax deduction and increased income during your life (on a sale of appreciated property) and your assets will benefit charity when you pass away. A true win/win.

What is a CRT?

A CRT is an irrevocable trust which you can create now.  You can transfer a portion of your assets to the trust which will be held for your benefit during your life (or the lives of you and your spouse) with the remainder passing to a charity or charities of your choice after your death.

How Does a CRT Work?

You can be the trustee of your CRT.  You do not lose control of your assets and can invest trust assets in financial instruments or securities of your choice.  You receive income throughout your life (or throughout the lives of you and your spouse).  Upon your demise, the remaining assets pass to one or more charities you designate. 

The most common type of CRT is a charitable remainder unitrust (“CRUT”).  In a CRUT, you select a percentage such as 5% or 6%, which will be paid to you as long as you live.  As the value of the trust assets increases or decreases, your payouts adjust proportionately.

What are the Advantages of a CRT?

A CRT will (1) give you a current income tax deduction; (2) let you sell appreciated property without paying any capital gains tax; (3) provide you with an income stream throughout your life; (4) protect your asset from any creditors; and (5) avoid estate taxes.

Income Tax Deduction

You receive an income tax deduction in the year you contribute assets to the trust based on the fair market value of the assets contributed. Your tax deduction by law must be at least 10% of the value of the assets contributed to the trust.

Avoidance of Capital Gains Tax

A common use of a CRT is to avoid paying capital gains tax on appreciated assets you may choose to sell at some future time.  When you contribute appreciated property and later sell it, 100% of the proceeds remain in the trust for your benefit throughout your life.  No capital gains taxes are owing.

Because no taxes are paid, all of the proceeds can be reinvested to generate larger payments for you.  For example, if you own property or securities worth $500,000 which has a tax basis of $100,000, you would pay $80,000 in capital gains tax (at a 20% rate) when you sell the property.  If you invest the remaining $420,000 at 5%, you would receive a $21,000 annual return.

Instead, if you create a CRT and contribute the property, you would receive no less than a $50,000 current income tax deduction.  If you later sell the property, no capital gains tax would be paid.  The annual return on the $500,000 of proceeds at 5% would be $25,000 per year, or $4,000 per year more than your return outside of a CRT.  Additionally, no future creditor could attach the $500,000 held in the CRT, whereas the $420,000 in the prior example would be fully exposed to such claims.

The bottom line in this example is that by using a CRT you receive: (1) no less than a $50,000 current income tax deduction in the year that you create the trust and transfer the property into it; (2) you do not pay any capital gains when you sell the property; (3) you generate $4,000 of extra income for you throughout your life; and (4) you benefit charity.

Conclusion

If you have charitable inclinations but want to retain the use of and income from your property during your life, a CRT may be perfect for you.  You receive greater tax benefits and income throughout your life.  Then, when you pass away, charities are benefited.  You will have done something good for yourself and good for the community. 


Robert L. Bolick is an estate planning and asset protection attorney in the Firm’s Las Vegas office. Mr. Bolick frequently presents about estate planning and asset protection throughout Las Vegas. 

Nevada Asset Protection Trusts

Robert L. Bolick, Shareholder

Nevada is well known for having some of the strongest asset protection laws in the country. Our homestead laws are very generous. Recent changes in the law have increased protection for annuities and life insurance. Clearly the strongest of all our asset protection tools is our asset protection trust statute.

Many people are vaguely aware that we now have an asset protection trust, but don’t know many of the particulars of what they are, how they work, and how strong they really are. The following are some questions and answers that hopefully will be helpful in providing information about these amazingly powerful trusts.

Won’t my living trust provide asset protection?

No, living trusts don’t offer any asset protection, period. As a revocable trust, the bad guys have the same rights to access your assets as you do.

Can I really have complete asset protection?

Absolutely! We have the strongest asset protection trust in the nation. In a recent independent study by Forbes Magazine, Nevada trusts received the only A+ rating, the highest in the nation for all asset protection trusts!

Is it legal?

Yes. All you have to do is comply with the statutory requirements and you can have 100% protection that is 100% legal.

How does the trust work?

You are the trustee of your trust and maintain control over all trust assets throughout your life. You can buy, sell, trade or reinvest assets at any time without the knowledge or consent of anyone else. The trust is not recorded or filed. No one even knows that your trust exists. All assets and transactions are strictly confidential. The result is to allow you full use and control of your assets while keeping the bad guys out. “Bad guys” are defined as anyone trying to get your assets.

Why must the trust be irrevocable?

NAPTs, by law, must be irrevocable. This is a good thing, not a bad thing. It must be irrevocable to provide asset protection. If the trust were revocable, the bad guys would have easy access to all trust assets.

Doesn’t that restrict what I can do?

Not in the slightest. As described above, you can be the trustee. You are in complete control of your trust and the assets. You can invest trust assets any way you like. You can take assets out any time you like. You can put assets in whenever you like.

Would my NAPT replace my living trust?

No. They serve different purposes. Your living trust will avoid probate. It will transfer your assets upon your demise to your beneficiaries in the way you desire. You can amend it at any time, for example, to change successor trustees or beneficiaries.

Your NAPT simply serves to protect your assets while you are alive. Generally the assets held in your NAPT pass to your living trust to then be held or distributed to your beneficiaries as you have set forth within your living trust.

When is the trust effective?

Asset protection begins after the assets have been held in your trust for two years. Asset protection trusts in most other states require a four-year waiting period. After two years your trust becomes “bulletproof.” No creditor can penetrate or attach any assets in your trust. You cannot be forced to distribute any assets. 

What assets can I hold in my trust?

Your trust can hold your home, any other real estate, investments, cash, securities and any other asset whether located in Nevada or elsewhere. You typically would not hold any vehicles in your trust, as they can be a source of liability. You don’t want to expose your valuable assets to unforeseen liabilities. Similarly, you can hold rental properties in an LLC and your LLC can be owned in your trust. Your LLC will protect your other assets held in your trust from any claims or liabilities arising from the rental.

What if I move out of Nevada?

You do not have to be a Nevada resident to have a NAPT. The only requirement is that at least one of your trustees be a Nevada resident. This person can be a friend or relative residing in Nevada, a Nevada bank or trust company, your attorney, accountant or other advisor. You still retain your position as the principal trustee with complete control over your assets held in your trust.

What if the liability has already happened?

Creating asset protection barriers, even after the fact, can still be beneficial. You won’t be 100% protected, but you can still put strong defenses in place. At a minimum, if your assets are harder to attach, you encourage settlement on more favorable terms.

Why doesn't everybody create an asset protection trust?

They should. With all of the uncertainties of life, bizarre outcomes of lawsuits and exorbitant jury awards, you can never be too safe. You can realize huge dividends by arranging your affairs now to protect yourself from the unforeseen. Nevada law affords you this excellent protection. Why not take advantage of it?

Is a NAPT expensive?

No. Not having a NAPT is. Creating a NAPT is a one-time expense. There are no annual administration costs or maintenance fees.

Robert L. Bolick is an estate planning and asset protection attorney in the Firm’s Las Vegas office. Mr. Bolick frequently presents about estate planning and asset protection throughout Las Vegas.