≡ Menu

Parent Child Joint Ownership of House – Not a Good Idea, a Trust is Better

Parent Child Joint Ownership of House
Parent child joint ownership of a house is a popular arrangement but it has many problems. In our view, it’s better to have the house in a trust.

Parent child joint ownership of a house is typically  joint ownership with rights of survivorship. It is a type of property arrangement where the interest is undivided and the death of one co-owner results to the surviving co-owner inheriting the deceased co-owner’s share, thus thereafter, completely owning the property.

Parent child joint ownership of a house is normally resorted to by parents in order to avoid probate. However, this type of joint ownership between parent and child can be problematic because the parents can lose the protection from creditors granted by the tenancy by the entirety regime, the child might have financial or debt problems in the future which could affect the property, the child will not enjoy a stepped up basis for his share when computing capital gains tax, the parent and child could have a dispute in the future, or family conflicts could arise if there are other children not included in the joint ownership.

The potential for a disputes between parent and child

In case there is a dispute between parent and child, the parent might not be able to get the consent of the child in selling the jointly owned property, even if the child received such property for free. For this reason, in transferring any property to the child, it is important to identify the purpose for the transfer and to see if there is a more appropriate estate planning document that can achieve such purpose aside from a joint ownership with the child of the property.

There is no creditor protection

Unlike a tenancy by the entirety setup which is enjoyed by spouses in New York when they acquire property together, parent child joint ownership of a house is not free from creditor protection. If the child has debts, such as student loans, which remain unpaid and files for bankruptcy, the trustee can make an immediate claim over the property by registering a restriction on the title. For this reason, any transfer of property to an adult child should be thought about carefully before making a decision.

There is a major tax downside to parent child joint ownership of a house

When property is transferred jointly to the parent and the child, the child will acquire the original cost basis, which should be the acquisition cost or the fair market value at the time of transfer if inherited. When the joint co-owner parent dies, the child, as the surviving co-owner, will receive the deceased parent’s share on a stepped-up basis, which is the fair market value at the time of the deceased parent’s death. In case the child decides to sell the property, his cost basis will be ½ the original acquisition cost and ½ the stepped up basis cost, which would result to higher capital gains taxes than if the child inherited the property entirely upon the parent’s death, where he would enjoy 100% stepped-up basis based on fair market value at the time of death. There will be no capital gains tax on the appreciation of the property in the hands of the parent from the original acquisition cost to the time of co-owner parent’s death.

For this reason, parent child joint ownership of a house is not a good arrangement from a tax standpoint.

To illustrate, if the property was acquired by the parent and the child at $100,000 in 2005 under a joint ownership property regime, both parent and child have a cost basis of $50,000 each. If the parent died in 2010 and the property had a fair market value of $200,000, the child would absorb the deceased parent’s ½ share at the stepped up basis of $100,000. If the child sells the property in 2020 at $400,000, his cost basis will be $50,000 (the original acquisition cost) plus $100,000 (the fair market value at the time he inherited the parent’s share), for a total basis of $150,000. His capital gains tax will be based on his capital gain of $250,000, which is $400,000 less $150,000.

If the child, however, simply inherited the entire property in 2010, his stepped up basis would be $200,000. If the child sells the property in 2020 at $400,00, he will only be liable for tax on his capital gain of $200,000.

Because of this, it’s important to take into consideration the reason for transferring the property jointly in the name of parent and child, because if there are other estate planning documents that could be used, those estate planning documents might be more appropriate considering the tax savings one can get if the property is left in the name of the parent alone.

Reasons for Joint Ownership and Other Alternatives

If the parent seeks to share title with the child in order to avoid probate, a revocable living trust is a more appropriate estate planning document. A revocable living trust allows the parent complete control over the property and is revocable. It does not require the child’s consent in case the parent decides to sell the property. It only becomes irrevocable upon the parent’s death. Property in a revocable living trust is considered a non-probate asset, and for this reason, a transfer of property by the parent to the revocable living trust can produce the same results as a transfer to the parent and child under joint ownership.

If the parent seeks joint ownership with the child because the parent is becoming physically or mentally incapacitated and requires the assistance of the child is managing his/her properties, a durable power of attorney is a more appropriate document. In this case, the parent just authorizes the child to perform certain acts as the parent’s agent, and the creditors of the child cannot access the property.

In planning one’s estate, it is always important to first list down the properties, its uses, and any income derived from it. This will assist the estates planning lawyer in drafting a comprehensive estate plan that could result to savings, while producing the results one seeks for, whether it is creditor protection, avoidance of probate, or tax savings.

If you would like to discuss your situation where there is parent child joint ownership of a house, we at the Law Offices of Albert Goodwin, are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at attorneyalbertgoodwin@gmail.com.