Reasons not to do it

Many people believe that putting the family home or other real estate in joint tenancy with their children is the best way to provide for post-death succession, without the need for involvement of the probate court. There are several complications which suggest the need to act cautiously.

1. Once a parent puts a child on the title of the home as a joint owner, the child is from that point forward a full joint owner. The parent cannot later decide to sell the house, rent it out, or seek a mortgage or home equity line from a bank or credit union, without the agreement of the child.
2. An older parent who is facing the prospect of admission to a nursing home in the next few years will find that the act of adding a child as joint owner of the home will be regarded by the Department of Human Services as a partial divestment of property, and this will result in a period of ineligibility for Medicaid benefits.
3. Depending on the circumstances, the creation of a new joint tenancy may result in the inadvertent “uncapping” of the taxable value of the real estate, resulting in higher property taxes. 
4. If the child who is added as a joint owner later has a judgment entered against him by a court, the judgment will have to be paid if the house is to be sold - even though the parents were the ones who paid for the house. 

Balanced against these, the only reason to add one or more joint tenants on a home is to avoid having to have the home subject to probate on the death of the current owner. For many clients, the reasons not to do it will outweigh this one consideration.

Under the General Property Tax Act, there is a limit (“cap”) on increases to property tax assessments while the property remains under the same ownership. In most cases, a transfer in ownership removes that limit and allows for “uncapping” the assessment, often leading to a higher property tax liability. The law provides for a number of exceptions.

The March 2011 decision of the Michigan Supreme Court in Klooster v. City of Charlevoix changed the general understanding of how and when the creation, modification, or termination of a joint tenancy will uncap assessed value.

Under the newly clarified rule explained in that case, you will not uncap the taxable value of the property by adding one or more new joint tenants if

• you or your spouse were an owner immediately after the most recent uncapping event and
• you have remained as an owner continuously since then.

If, on the other hand, someone else (other than a spouse) added you as a joint tenant, and then died leaving you as the surviving owner, adding a new joint tenant will uncap the taxable value.

Update 1-24-15: John Payne's article The Curious Case of the Persistent Step-Up deconstructs a myth that misleads many lawyers. So long as the property is included in the decedent's estate, the surviving joint will still receive the step-up in basis. Thus capital gains considerations should not affect the decision on whether to use this probate avoidance technique.