My husband and I own some hunting land up north Minnesota as joint tenants. After his passing, I became the sole owner. I am thinking about adding my sons to the deed so we would all be joint tenants. I heard this will avoid probate when I die. Is a joint tenancy a good idea?
If your only concern is avoiding probate, transferring the property to a joint tenancy with your sons will accomplish this and is a commonly-used tool, but there may be a better way to accomplish the same result.
There are risks in joint tenancies. A joint tenancy will pass a present interest to your sons, and accordingly: (1) You will need their permission regarding all future transactions regarding the property; (2) The property can be used to satisfy any future judgments against yourself, and possibly more importantly, your sons; (3) The property may be brought into bankruptcy proceedings involving you or your sons; and (4) If either of your sons are married and ever get divorced, the property may be brought into those proceedings as well. In addition, due to the nature of a joint tenancy, the last surviving tenant will ultimately end up with the entire interest in the property if it is not previously sold. This means the heirs of the first tenants who pass would not inherit the property. Moreover, with regard to the tax treatment, the stepped-up basis will not apply to the interest transferred, resulting in the possibility of higher capital gains taxes being owed at the time of any future sale of the property.
There are two other tools that may be less risky and will accomplish the same result: the transfer on death deed and the life estate.
Transfer on death deeds are a relatively new tool allowed by the passing of Minnesota Statute § 507.071 in 2008. It allows for the transfer of real estate at the death of the owner without the need for probate so long as the deed is properly executed and recorded. While this requires the following of very specific statutory requirements it also helps avoid the risks associated with joint tenancies. Namely, it allows you to maintain control of the property until your passing allowing you to sell the property or revoke the gift without the permission of your sons. Further, because no interest in the property is transferred until your passing, it will not be subject to creditor claims of your sons until the time the property is transferred and also cannot be brought into bankruptcy proceedings or divorce proceedings of your sons until then. A transfer on death deed allows you to transfer title to your sons on your passing outside of probate as either joint tenants or tenants in common, which provides the added benefit of allowing you to give each son a half-interest in the property regardless of which son is the eventual survivor and provides for a full step-up in basis rather than a half step-up in basis which could prevent the payment of extra capital gains taxes. However, you should be aware that the use of a transfer on death deed does nothing to protect the property from Medical Assistance claims while a joint tenancy may be able to do so depending on the exact circumstances.
Another alternative option is the use of a life estate. A life estate is established when a parent transfers title to his or her home but reserves the right to live in the house for the remainder of the parent’s life. A life estate avoids the following issues similar to a transfer on death deed as compared to a joint tenancy: (1) Avoids probate; (2) Allows you to transfer title to your sons as joint tenants or tenants-in-common; and (3) Allows for a full step-up in basis allowing for the payment of less taxes at the time of the sale of the property. Additionally, it has the advantage of allowing medical assistance claims/liens to only apply to the value of the life estate and not the entire property as with a transfer on death deed so long as the time requirements between the date of the transfer and the medical assistance claims are met. However, it does not prevent the attachment of judgments/liens of your sons or the ability of the property to be brought into bankruptcy or divorce proceedings of your sons. Additionally, it does not give you sole control until your passing (your sons’ permission would be needed if you want to sell the property after the creation of the life estate and the transfer also cannot be revoked without their permission).
Congratulations on being proactive and thinking about these types of issues. Before you make any type of transfer you should consult an attorney to discuss your specific facts in detail and to also assist in making an informed decision about what type of transfer suits your situation based upon the other elements of your estate plan.