Will Joint Tenancy Avoid Probate?

The short answer is yes, assuming at least one of the joint tenants survives.  But joint tenancy may not be the best way to pass on your family treasures to the next generation.  It very well could leave a huge tax savings on the table for Uncle Sam to gobble up. 

The concept is best illustrated by an example.  If you buy stock for $10 and later sell it for $15, you have a ‘taxable gain” of $5.   But if you inherit that same stock, your tax basis is $15, its value on the date of death.  In other words, $5 goes untaxed!  Its not often Uncle Sam lets a gain go untaxed. 

Now, assume Mom, a single parent, has done well in the stock market.  Her investment account is valued at $500,000 but her “tax basis” (what she actually paid for the stock) is only $200,000, meaning there is a taxable gain of $300,000.  To avoid probate, she puts her only son, Junior, on the account as a joint tenant.  Ignoring for our purposes the possible gift tax issues, if Mom were to die tomorrow, under the tax code Junior ‘inherit” only half of the stock portfolio, Mom’s joint tenancy interest.  Consequently, his tax basis would be $350,000.  If Junior were to sell, he would pay tax on a $150,000 gain. 

However, if the stock were in a trust, Junior’s tax basis would be $500,000, the value on Mom’s date of death.  $150,000 would escape federal tax.