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Trying due diligence with updating my will and all that. (What do you get when you mix byzantine loophole-laws with contemplating your own death? A barrel of fun, that's what.)

Question one of one thousand: Let's say you have a nontrivially valuable car that you know who you want to have it if you were to die—(presumably not in an accident that killed you, in which case even if it were fixable afterward, they may not want it.) Is it just better to add that person to your title as a joint owner while you're alive?

I ask because it seems that adding a person to a title is a relatively simple process. Removing a dead person from a joint title looks relatively simple also. I don't see anything about taxes or inheritance policies, just vehicle registration fees. However, if the person wasn't on the title already prior to the death... things appear to get complicated and involve inheritance taxes/etc.

Am I reading this wrong, or is best to just be a co-owner on the car with that person? Assume trust w/said person 100%, so there would not be any problem if you wanted to sell the car while living.

(This is in California, if that matters. Also if it matters: the person I'd want on the title is not a family member.)

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    Are sure if (God forbid) you get into an accident and are sued, the person on the title doesn't get taken into the suit? My wife and I are not on the titles to each other's cars.
    – JTP - Apologise to Monica ♦
    Jun 5, 2013 at 4:30
  • @JoeTaxpayer Hrm, I hadn't thought of that. :-/ That is a good question. If that is the case that liability must be traded against the tax liability...but wouldn't it be about the insurance and not the title? Does insurance have to cover everyone on the joint title (I've been joint on home leases, but not on a car title before.) Thinking aloud here, wouldn't your line of thinking imply that a bank that owned a title for a car you hadn't paid off could be sued for your accident? That can't be right.
    – HostileFork says dont trust SE
    Jun 5, 2013 at 4:46
  • I don't know, just putting out this thought. I wasn't aware the bank cut ally held the title, I thought they had a lien on the car. I've never had a car loan. For this type of asset there's not going to be a tax issue, the current estate exemption is $5.25M
    – JTP - Apologise to Monica ♦
    Jun 5, 2013 at 5:09
  • @JoeTaxpayer I thought exemptions like that only applied if you were married or related..and giving random property to non-related people was subject to something akin to the gift tax and would be limited by the $13K/yr or maybe something more conservative. If I'm wrong on that understanding, that's cool..if I can leave $5.25M to someone unrelated and not be taxed in the event of my death then that makes this all much easier...because I do not have that much money. :-) Also, in my experience, no... the bank does have the car title, if you had it you could sell the car! This car is paid off.
    – HostileFork says dont trust SE
    Jun 5, 2013 at 5:25
  • @HostileFork the $5.25M exemption is shared between the gift and the estate tax, so using it now reduces it later, but in the end its a zero-sum game. The only question is who's paying the tax - you or the heirs.
    – littleadv
    Jun 5, 2013 at 7:08

3 Answers 3

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If you add a co-owner - you'll be subject to gift tax which is exactly the same as the estate tax. There's one benefit however: gift tax has a $14K exemption a year. So you might save a bit of a tax by giving the gift now instead of having it inherited later, but on the other hand - it will be you paying the tax now instead of the heir later.

Of course, all the issues raised in the comments about co-ownership are valid - liability, you won't be able to change your mind (you can change your will any time, but you can't take a gift back after given), etc.

Reading the comments, I feel that some more elaboration is needed.

Disclaimer

Note: I'm neither a lawyer nor a tax professional. Get a legal advice from an estate attorney licensed in your state. Get a tax advice from an EA or a CPA licensed in your state. I only write my opinions based on my understanding of how things are.

Gifting

Re the gift tax: the tax applies to the value given. So if you have a $100K Tesla S, and you add an owner to split the ownership in half - the gift tax will apply to the $50K given (half of the value of the car), and the $36K above the exemption will be taxed (assuming you didn't give that person anything else throughout the year). You can mitigate the tax using the $5.25M lifetime exemption, or you can pay the tax and keep the exemption for the estate tax later.

The tax is assessed against the FMV: Fair Market Value of the gift. So if instead of a brand new Tesla S you give away half of the 1993 Honda Civic that is currently worth about $3K, you'll have $1.5K subject to tax (which is way below the $14K gift tax exemption), and it doesn't matter that 20 years ago the car was worth $15K.

Re the liability: insurance company will only issue insurance to the person(s) on the title. I know that because I checked, and I'm in California as well. So if you give away half of the car - you'll have to be tied to that person wrt the car insurance. You'll have to have insurance good enough to cover both of you, not just you.

If there's a loan on the car, there's a lien on it. You can't change the title (ownership) until the lien is removed. The bank will only remove it when the loan is repaid.

Probate

This paragraph that you wrote show that you don't understand how the estate and probate work:

I ask because it seems that adding a person to a title is a relatively simple process. Removing a dead person from a joint title looks relatively simple also. I don't see anything about taxes or inheritance policies, just vehicle registration fees. However, if the person wasn't on the title already prior to the death... things appear to get complicated and involve inheritance taxes/etc.

The fact that the car is co-owned doesn't make removing the dead person simple. Unless the title is held jointly with the right of survivorship, your part of ownership will have to go through the probate court. This kind of title is common for married couples wrt real estate, but I don't think you can do it for cars. Maybe you can, ask at the DMV.

Probate means that the court will assign ownership per your will/inheritance laws, and it is a lengthy process that can go on for months (and years, if there are disputes) during which the car title can not be changed. It will be held by the estate executor until the court approves the heirs to take possession. There are ways to avoid this, but you have to talk to a estate attorney about this.

Bottom line

Estate planning is a complicated task and there are people who do it for a living. You should talk to these people, they're called "estate attorneys". They can provide you with a proper legal advice, build a proper structure and suggest the proper ways to manage and own your property in order to minimize problems and taxes later. Make sure to also talk with a tax adviser and make sure the attorney and the tax adviser are on the same page. Many times attorneys don't take tax considerations in the account (although estate attorneys specifically probably do, since its a very large portion of their work).

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  • But how can a title owner be considered liable for a car accident when someone else was driving the car? I feel my point about the bank must be correct. If a tax applies when you add a co-owner, then how could that be rated at the full cost of the car? Is it half? Is it purchase price or do you have to get an assessment, what does the IRS consider a taxable assessment? (I swear I live in the wrong time period, money and the people who print it on whims should not exist. :-/ This country needs a better class of criminal.)
    – HostileFork says dont trust SE
    Jun 5, 2013 at 7:12
  • @HostileFork if you have your name on the title - you have to have your name on the insurance. So whoever is on the title will be the one (or two) insured. Why it is a liability? Because you let someone do something bad in your car - you will be held responsible. Re the tax - its the proportion of ownership. If you add a co-owner - you split the ownership 50/50, so the tax applies on 50% of the FMV of the car. The fact that there's a loan attached to the car is not relevant to this. The bank however may not let you change the ownership until the loan is repaid.
    – littleadv
    Jun 5, 2013 at 7:19
  • FMV is "fair market value", so you might be required to get an assessment, yes.
    – littleadv
    Jun 5, 2013 at 7:20
  • There's no loan, so what you're saying is 50% FMV based on an assessment from a "government authorized assessor". But then upon death the remaining 50% FMV (depreciated) would be a gift? This seems nuts. Does the IRS actually do this on purchases they've already gotten the tax for on initial sale when people die? Sigh, no wonder so many people don't bother with sorting any of this out. (Step 1: bury friend, go to funeral. Step 2: Take car to assessor, pay tax on car that was already taxed at time of purchase. Step 3: sell car to pay tax on already taxed car you cannot afford.) Madness.
    – HostileFork says dont trust SE
    Jun 5, 2013 at 7:24
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    @HostileFork the remaining (depreciated) 50% will not be a gift, it will be estate. Mere co-ownership doesn't mean the other half goes to that person as well, you need to have it written in the will. Gift and estate taxes are the same, as I said. Yes, estate tax is double taxation. Its not fair, and not many countries have it. US is one of those countries. US taxation is extremely aggressive, and having lived elsewhere I have something to compare against. But that's why you have the right to vote, isn't it? Vote.
    – littleadv
    Jun 5, 2013 at 7:39
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Ignoring the obvious issues regarding gift tax and probate, you open another can of worms regarding ownership.

Lets say you decide to sell the car before you die. Now you have to get your new co-owner to sign the paperwork. If they were only in the will this could be handled without their cooperation.

If you get angry with them next year, they have to sign the paperwork to give their portion of the car back.

If they are desperate for money they may try to get a cash advance loan using the title.

It becomes a part of their estate. What happens if they die first. They may give their car to somebody who wants to sell the car, or drive it every weekend. They might have to sell the car because of their probate process.

What happens if they lose a court case and the judge orders the car sold to pay their debts.

Ownership gets even more complex if they are a minor. Their ability to sign some of the paperwork is limited.

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  • +1 for raising good points, and they are probably applicable to many people who might hit this post from Google or whatever. In my case I'm not concerned about trust issues, just the car is kind of a special thing...and I'd like the narrative to not be "hey...your friend died, here's the car, and here's your tax bill for it". (Had two family members + a friend of the family die in a week's time last month, sort of a reminder.)
    – HostileFork says dont trust SE
    Jun 5, 2013 at 17:26
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    +1. Unless you expect to exhause the gift exemption or have a very large inheritance, no reason not to just leave it to someone in the will. Oh, and never ever leave anything to probate, it is like giving the system a blank check.
    – JAGAnalyst
    Jun 5, 2013 at 19:07
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For everyone involved here, especially JoeTaxpayer, anyone listed on the title to a vehicle may be held liable in the event of an accident. Where JoeTaxpayer's plan is off, is since he and his wife are married, they are both liable regardless of title reading. This works similar to a debt one takes in when they are married. If it happens when you are married, you are both responsible for indemnifying those owed.

To answer the original question, I would NOT list the individual as an additional owner. If this is a mediocre valued vehicle, I would simply will it to them as the tax to liability implications are HUGE! The taxes would be reasonably cheap for transfer, where the liability implications could end up costing the person the rest of their life. Different states have different laws for auto insurance. Iowa for example states the insurance follows the vehicle regardless of whom would be driving. Other states say the liability coverage follows the person listed as insured and no others!

My question for you, is if this is a second vehicle and you do not utilize it much or would be willing to part with the vehicle now, why not just do a family gift and fore-go any taxation? Most states will allow a transfer of title between family members at any time without the necessity of paying a value or gift tax on the property. Check with the local DMV/MVD office in order to see how your state in particular handles such a transfer.

Good luck and hopefully fates wheel doesn't find you soon!

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  • Can you cite where you are getting your information about liability of a spouse whose name does not appear on a title? Is this something that applies to community-property states only, or is it something more generally applicable (not just in the US but elsewhere too)?
    – Dilip Sarwate
    Jun 6, 2013 at 14:50
  • Also, is it specific to cars, or is it the consequence (applied to cars) of some general principle of spouses being liable for each others' debts when they co-own all the assets.
    – Steve Jessop
    Jan 26, 2015 at 13:50

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