In Texas, co-owners of property can have a right of survivorship to the property they co-own. Co-ownership with the right of survivorship means that when one co-owner dies, the surviving co-owner becomes the sole owner of the property without the necessity of opening a probate estate. But, using this method of estate planning can cause unexpected tax and legal problems.
Example: You decide to make your son a co-owner of your property so that it will pass to him at your death without him having to hire a lawyer and file to probate your will. While the property will go to your son outside of probate, you have created some tax and legal issues that you didn’t intend to happen.
First, you have created a tax issue by causing a reduction in your Federal Estate Tax Exemption because you are giving a lifetime gift (assuming half the property is valued at greater than $15,000 in the calendar year of the gift as of 2021).
Second, you have created a capital gains tax problem for your son. When you give half the property to your son during your lifetime, he takes your original basis in half of the property. When your son sells the property, he will owe significant capital gains tax on the half you gave him. If, however, you wait and give the property to your son at your death, he will get a full step-up in basis to the fair market value of the property on the date of your death. The full step-up in basis means your son will owe no capital gains tax if he sells the property shortly after your death.
Third, you have created a legal issue that could put your property at risk. By making your son a co-owner of your property, you are opening the door to any potential claims by your son’s creditors. Your son’s one-half interest in the property may be subject to claims to satisfy his debts.
There are numerous legal and tax implications when preparing an estate plan. It is easy to miss the particular nuances that could cost your family a lot of money if your estate plan isn’t set up by someone skilled in the art of estate planning.
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