Often, a homeowner adds their heir as a joint tenant owner to avoid probate. A joint tenant owner can create problems. There are better alternatives. Revocable Transfer on Death Deeds (TODD) and revocable living trusts are good alternatives to joint tenancy.
Revocable Transfer on Death Deeds (TODD)
A TODD does not change ownership and, as a result, has no unfavorable effect on property tax and capital gains tax. In addition, this deed is straightforward and low-cost.
The major drawback of a TODD is that title companies are reluctant to issue title insurance for three years after the owner’s death. A TODD, in effect, prohibits the new owner’s sale or use of the real property as loan collateral for three years. Another drawback is that a TODD cannot provide a contingency if the intended heir dies before the owner.
Another viable alternative is a trust. Trust problems are the cost and, more importantly, their complexity. Trusts are not easy to understand and require the transfer of real property to the trust. Trust owners often overlook this requirement of deed transfer which results in probate administration. But a properly funded trust allows for contingencies, avoids probate, is private, and has favorable property tax and capital gains treatment.
The unintended consequences of adding a co-owner to real property are;
- unfavorable tax treatment
- exposure to the new owner’s creditors
- relinquished control to sell and mortgage the real property, and
- failure to transfer due to an unplanned order of death.
Sum it up
Viable alternatives to joint tenancy are Transfer on Death Deeds (“TODDs”) and revocable living trusts. But TODDs are new and need to be thoroughly tested. Trusts are complicated, but when properly funded, they avoid probate, are private, do not create unfavorable tax consequences, and the owner maintains control of the real property.