DEAR BENNY: My parents (now in their 80s) own a fourplex with my brother and his wife as joint tenants with right of survivorship. They agreed to a 50/50 partnership at the beginning. Both couples agree that if they died their respective 50 percent share would go to their respective estate and not to the remaining partners.
Question 1: Shouldn’t they have the title redrawn as tenants in common to do what they initially intended?
Question 2: If my brother and his wife refuse to go along with changing the title to the property to tenants in common (which they may not want to do), can my parents proceed to change it without their partners’ consent?
My brother and his wife have made it very clear that they want their 50 percent share to go to their kids in the case of their death, but they may be banking on acquiring 100 percent of property upon my parents’ death (because of their advanced age) if title stays the way it is. –Meg
DEAR MEG: The fourplex, in my opinion, is titled in a very confusing way. When property is held as joint tenants (or preferably joint tenants with rights of survivorship), on the death of one joint tenant the property automatically is vested in the name of the survivor. We lawyers call this "title by operation of law." So if X and Y own title as joint tenants, when X dies, Y becomes the sole owner. No probate is required.
In your parents’ situation, what happens if your dad dies? Presumably, the remaining three owners remain in title, again as joint tenants.
But if the intention of the parties was their respective heirs are to inherit the property on their death, that will not happen the way title is currently held.
The best way to accomplish that is as follows: "mom and dad as joint tenants with rights of survivorship as to their interest and as tenants in common with brother and wife, who hold title as joint tenants with rights of survivorship as to their interest."
Your parents should discuss this with their son. You should stay out of this issue, other than to show them my answer in this column. But if your brother is unwilling to cooperate, it is possible for your parents — without their son’s permission — to break the joint tenancy arrangement and change it to a tenant-in-common title.
I have done this several times for clients, under similar situations. A joint tenancy can be unilaterally broken. However, your parents should consult their own attorney to assist them in the proper procedure and drafting of the new title arrangement.
DEAR BENNY: In a recent column, you indicated that a giftor’s lifetime tax exemption is $1 million. However, after searching this out, I believe that for 2011 the lifetime gift tax exemption is $5 million, which is the same as the federal estate tax exemption. Am I wrong? –Frank
DEAR FRANK: You are correct. For years 2011 and 2012, the lifetime gift tax exemption is $5 million. This is the same amount as the federal estate tax exemption. What this means is that in your lifetime, you can give up to that amount. However, there is a catch: This amount will then be subtracted from your estate tax exemption.
That does not mean, however, that you should give all that money to your children tomorrow. In addition to the lifetime exemption, you are still entitled to the annual gift tax exclusion, which for 2011 is $13,000. That means that you can give up to that amount to anyone and everyone, and neither you nor the recipients will have to file any tax returns on that nor will they have to pay any tax. And the $13,000 annual exclusion does not reduce your lifetime $5 million gift and estate tax exemption.
This is beneficial for parents who want to help their married children buy a house. For example, if you have a married son and a married daughter, you can give each one of them $13,000 (or $26,000 per couple). You can also give the same amount to all of your grandchildren.
It should be noted that although the $5 million gift and estate tax exemption passed by Congress is the law until 2012, there is a good chance that the exemption will continue in at least that amount in later years. But stay tuned: Congress is completely unpredictable.
DEAR BENNY: We want to gift our daughter a house that we paid $123,000 for in 1999. We made approximately $20,000 in improvements to the house. Because of the depressed housing market, we believe the value of the house remains at the price we paid for it. Because our daughter suffered a stroke, she is on Social Security disability and is unable to work. What effect, if any, would gifting the house to her have on her Social Security disability? And what effect, if any, would it have on us? –Ardath
DEAR ARDATH: My first question is why you want to even consider gifting the house to your daughter. Are you trying to reduce your estate? Do you have another house — and sufficient assets — so as to live comfortably?
Regardless of your motives, there are several issues you must consider.
First are tax issues: If you gift the property to your daughter, she will receive your tax basis, which you have indicated is approximately the cost. Tax basis is the value of the property when it was bought, plus any improvements made over the years. When the property is sold, you have an adjusted sales price. That is the sales price less such items as closing costs and real estate commissions. Profit is determined by subtracting the basis from the adjusted sales price.
No big issue there except that if you instead keep the property and leave it to her when you die, she will receive a basis stepped up to the appreciated value as of the date of your death. Oversimplified, this could mean a substantial savings in capital gains tax.
I recognize that readers will say: Well, if she owns and lives in the house for at least two out of the five years before the property is sold, the daughter can claim the up-to-$250,000 exclusion of gain, and may not have to pay any capital gains tax.
That is correct, but with two caveats: First, the daughter is disabled and may not be able to live in the house for that length of time. Second, Congress may tamper with the exclusion and it may not be with us in the years to come.
Second, there may be gift tax issues. Because the value of the gift would be greater than the annual exclusion (which is $13,000 per person), you will need to report the gift to the extent the current value is greater than $26,000 — i.e., $13,000 each. So you would each need to report around $50,000 against their $5 million lifetime exemption. Depending on your total net worth, this may not be a problem for you.
However, the bigger issue is that it is very likely that if your daughter is given the property, her government benefits could be reduced or terminated. There may be an exception for a personal residence so that it may not be counted as an asset for purposes of determining her qualification for disability benefits.
You must consult with an attorney in the state from which your daughter is receiving benefits (or will receive them after she moves to your house. The laws very from state to state on this.
So, before you make your final decision, talk with an attorney on all these issues. You don’t want to do something that can hurt both you and your daughter financially, even though it sounds like a good deed.
