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If you and your partner acquire an asset together, you need to decide how you will legally "own" it. There are three basic choices:Joint Tenancy with Right of Survivorship Tenancy in Common Community Property
For the vast majority of you, I think Joint Tenancy with Right of Survivorship is the way to go. Let me explain a bit more.
Joint Tenancy with Right of Survivorship: If you don't live in a community property state (more info on that below) I think JTWROS is the best way for you and your spouse or partner to take ownership of an asset, such as your home. With this agreement you both have an equal share of the asset and when one of you dies the survivor automatically inherits the deceased's portion of the asset. With a JTWROS agreement the surviving "owner" won't need to go through the time consuming and expensive probate court process. A nice added benefit of JTWROS is that the deceased’s half of the asset will be given a step-up in cost basis, which will minimize the survivor's tax bill if he or she decides to sell the home.
I bet an example would help. Let's say you buy a home for $200,000 and you own it in JTWROS with your partner. So you each have a cost basis of $100,000. Now let's say that 30 years later the house is worth $800,000, when your partner passes. The deceased partner's cost basis becomes $400,000 while your cost basis stays at $100,000. So the new combined cost basis is $500,000 not $200,000. That's going to reduce your tax bill if you decide to sell the home.
Tenancy in Common is a legal agreement where the co-owners do not automatically inherit the other person's share of the asset when there is a death. Basically you agree to own the asset together, but each of you names someone else as your beneficiary/heir. For example, you and a friend buy a condo together and own the property as a TIC. In your living revocable trust you stipulate that your mother, or cousin, or whomever you name, is to inherit your portion of the home. Not your co-owner.
I prefer JTWROS to TIC, but there is one circumstance where TIC can make sense: if you remarry and want your children from a previous marriage to inherit your portion of a home bought with your new spouse, a TIC can be an effective way of making sure your kids inherit your share of the house. But I advise working with a lawyer closely on doing this. What you want to avoid is having anyone's kids' force the surviving spouse to sell the home. In this instance I recommend using a QTIP Trust. With this setup you and your spouse own the home as TIC, but when one of you dies, the home passes into the QTIP trust, which allows the surviving spouse to remain in the home. Then when the surviving spouse passes your share of the home would finally pass to your children from the previous marriage.
Community Property is a lot like JTWROS with one extra benefit. In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) any asset you acquire with a spouse is considered to be equally-shared property. The added benefit is that when you own a home as community property the surviving spouse will receive a step-up in cost basis on the entire value of the home, not just the 50 percent that was the deceased spouse’s share of the asset. That said, the inheritance part of owning a home as community property can be a little stickier than with JTWROS; in some instances you may need to go through probate. Again, work with a good estate lawyer to see if there is a way to work around probate. In Arizona, Nevada, Texas and Wisconsin you can add a Right of Survivorship clause to your community property agreement which will ease the inheritance process.