estate planning options – Richard Phillips

Estate Planning Pitfalls of Joint Ownership

Oftentimes, spouses own their assets together. The advantage of doing so is ease of managing the asset or assets, especially if one spouse becomes disabled or when a spouse passes away. These assets often have a right-of-survivorship designation. This designation means when one spouse or joint owner dies, the assets passes wholly and immediately to the surviving spouse or owner. It’s as if the deceased person never owned it. Such a circumstance presents pitfalls to watch out for in estate planning.

Probate of the Asset When the Surviving Owner Dies

One of the advantages of spouses holding title to property together with a right-of-survivorship provision is that when the first spouse passes away, the asset immediately passes to surviving spouse’s estate without going through the probate process at the courthouse. That’s true, but only when the first spouse dies. If the surviving spouse engages in no additional estate planning to make provision for that asset upon their death, it’s likely such an asset could be part of an expensive probate proceeding.

Unintentionally Disinheriting Children

It’s not unusual for a surviving spouse to add one of their children as a joint owner on some or all of their financial accounts. This scenario usually occurs because the parent is elderly and increasingly infirm and figures adding a child as a joint owner on the parent’s accounts will help with the ease of the administration of such assets. The child can write checks on the parent’s behalf, deal with the bank or other financial institution, etc. However, adding a child as a joint owner on your accounts is fraught with peril.

The biggest peril is what if you have more than one child. But you chose one child as joint owner, thinking that one lives closest and it’s easiest for that particular child to assist you with your financial transactions. Well, when the parent passes away, the right-of-survivorship provisions automatically places those assets in the estate of the one child who was the surviving joint owner on all of the accounts. Thus, the other children receive no inheritance from those assets.

Other disadvantages of adding a child as a joint owner on your accounts include possibly exposing your assets to your child’s creditors and troubles with management of the asset if you no longer wish for that child to be a joint owner- typically, you have to get that child’s permission to be removed as a joint owner on your account.

What’s the best way to have a child help you with your financial accounts while hot possibly imperiling your assets in the manner discussed above? Instead of adding a child as a joint owner on your financial accounts, ask the bank or financial institution to add your child as an “authorized signer” on such accounts. That way, your child can sign checks and do other financial transactions on your behalf, but are not considered a co-owner of the accounts.

Tax Disadvantages for Significant Estates

Joint ownership of assets with your spouse can present potential tax disadvantages to your estate, especially if your estate is approaching the limit of the federal death tax exemption. As mentioned earlier, when two spouses own assets together as joint tenants with right-of-survivorship, the entire asset passes to the surviving spouse immediately upon the first spouse’s death. It’s as if the first spouse to die never owned it.

When a person dies, there is the potential for their estate to pay a federal death tax of 40% on what the estate owns. Congress has granted an individual death tax exemption over the years, meaning a person’s estate could exempt a certain amount from the death tax but anything over the exemption limit would be taxed at the going rate. Fortunately, the death tax exemption has increased about 800% the last fifteen years from $650,000 to 5.5 million dollars. Unfortunately, twice in the last five years Congress has come close to pushing this exemption back down to one million dollars.

How this applies to joint tenancy ownership is that when the first spouse dies, that spouse’s individual exemption is forfeited for the formerly jointly-owned asset. So when the surviving spouse passes away, their estate can only use one federal death tax exemption. Whereas, if the spouses estates were kept separate for tax purposes, both spouses federal death tax exemptions could be utilized. Conceivably, a married couple could exempt twice as much of their assets from a potential federal death tax by utilizing proper estate planning. This proper planning usually involves the creation of a Revocable Living Trust as the core the spouses estate plan, plus property agreements that work with the Trust to more flexibly allocate assets between both spouses estates after the first spouse passes away.

The Cost of Doing Nothing

The most popular estate planning option: doing nothing. The more technical term for this lack of planning is called “dying intestate.”

Dying Intestate: “Dying intestate” simply means that you have decided to depart this world without creating any estate planning whatsoever, not even a will. While your family will be horrified at this prospect, your unintended beneficiaries, the government and the probate court, will be delighted. Because by dying intestate, you have allowed the government to draft your estate plan for you. As a result, they can tax your estate and impose other costs at the maximum amount allowable by law. Also, your estate will go to people according to how state law decides, not what your personal wishes may have been. For example, most married couples want their share of the estate to be used by the surviving spouse before the children inherit. However, if you have a blended family situation and provided no direction ahead of time, when you die, the court will only give one-third of your estate to your surviving spouse and two-thirds to your children from a previous marriage. Regardless of your family’s particular circumstances.

This is the most popular estate planning option. Almost two-thirds of us will choose to do no estate planning before we die.

But this problem is exacerbated before you die if you have no incapacity planning documents in place. If you become mentally incapacitated and can no longer handle your own affairs, without the proper documentation drafted ahead of time, you will have to go through a legal proceeding where a court appoints a guardian to handle your personal affairs and a conservator to handle your finances. The procedure is oftentimes referred to as “living probate.”

And living probate can be a living nightmare for you and your family for several reasons. First, it’s a humiliating process. You are declared incompetent in a public proceeding. Next, the court is in charge. The court will decide which people will manage your affairs; it’s neither you nor your family’s choice. Most of the time, the court will chose a family member, but that’s not a guarantee and no guarantee they would chose the “right” family member.

Because of this court proceeding, there is lag time in the management of your affairs due to paperwork and delays. Of course, these hassles can add a lot of stress to what is already a very stressful situation for your family.

Finally, living probate can be very expensive. Typically, there are court fees, attorneys’ fees, expert witness fees and accounting fees. Additionally, once your conservator has been appointed by the court, this person has to give an annual accounting to the court on how your financial affairs have been managed. This is true even if the court appointed your spouse or one of your children as your conservator.

Doing nothing does not sound like an appealing prospect for your family. Remember, that is who you’re doing estate planning for. It’s not about you. When your estate plan is operational, you are either dead or mentally incapacitated and don’t know what’s going on. Proper estate planning is for your family’s peace of mind.

Why You Should Consider Trust Planning

Why You Should Consider Trust Planning

By Richard E. Phillips

When most people think about estate planning (if they think about it at all), most people believe their best or only option is a will combined with some joint tenancy or transfer-on-death arrangements for their financial accounts. However, there is a superior method to estate planning that’s existed for several hundred years and allows you to peacefully and privately transfer your wealth after you die to your loved ones. This method is an estate plan built around a revocable living trust.

Like a will, a trust is a legal document which addresses how your estate will be administered and disposed of after you die. However, there is an important difference. A will is a testamentary document by you that does not take effect until after you pass away. Until then, it does nothing for your estate. Furthermore, after you die, the will must be qualified publicly before your local probate court as part of a potentially very expensive government administration.

Unlike a will, a trust is a private contract between you as creator of the trust and the one who is re-titling your assets into the name of your trust (very important!) and you as the manager of the trust assets. The trust is effective immediately upon you signing your trust agreement and will successfully manage your estate upon your incapacity or death, so long as your assets remain titled in the name of your trust or the trust is designated as a beneficiary of your assets.

The main advantages of estate planning through a revocable living trust over other basic estate planning options are the following:

Avoids probate.
Privacy.
Incapacity Management.
Maximizes Death Tax Exemptions.
Flexibility.

Avoids probate. Since a trust is a private contract which determines the terms of how its assets are to be managed upon your incapacity and death, there is no need to have a third party bureaucratic entity administering your estate. The main reason for the probate process is to change title to property from a dead person’s name to that person’s living beneficiaries. With a trust, however, you already retitled your assets during your lifetime out of your individual name and into the name of your trust. Thus, when you die there are no assets owned in your individual name. Therefore, your estate has no reason to go through probate.

Privacy. Because a trust is a private document which is administered privately, there is no need of the public process of probate. No need to have your assets sold at a public estate auction nor will your loved ones be bothered by people looking to take advantage of your estate because they could review your will at the probate court.

Incapacity Management. If you have only a simple will drafted, but you become incapacitated during your lifetime, who will handle your financial affairs for you? If you don’t have an appropriate power of attorney document in place for such a contingency, there would have to be a guardianship proceeding, known as “living probate,” where the court (not you, not your family) decides who will manage your affairs for you. With a trust, however, you can appoint the person who not only will manage your estate after you die, but also in case of your mental incapacity.

Maximizes Death Tax Exemptions. Death taxes have been a plague on transferring wealth for decades. But the fallout from possible death taxes worsens when a family estate plan does not take this issue into account. Every individual is entitled under the law to exempt up to a certain amount of his or her estate after death from the federal death tax. Most couples, however, unwittingly forfeit the use of the first spouse’s death tax exemption by either electing to use the unlimited marital deduction at the first spouse’s death or deciding that it’s best to own joint property in both their names as joint tenants with right of survivorship.

Unfortunately, when a couple owns property together as joint tenants with right of survivorship (or tenancies by the entirety with right of survivorship), the right of survivorship provision applies immediately and transfers the entire property interest into the surviving spouse’s estate. Thus, the first spouse to die’s death tax exemption will not apply to those assets no longer in his or her estate. A trust, however, is a very flexible agreement that can allow the property of the trust to be allocated between both spouse’s estates and maximize the use of both spouse’s death tax exemptions.

Flexibility. As you have read, a trust is a versatile and flexible document. This flexibility is further apparent in how it can work with your transfer-on-death (TOD) accounts in leaving a lasting legacy to your children and grandchildren.

For example, suppose you have two adult children. One is very responsible, but the other is financially irresponsible. Typically, most parents designate their children individually as the beneficiaries of their financial accounts without considering how they can protect the wealth they’re leaving from a child’s creditors or future ex-spouse. Instead, you can establish trusts in your revocable living trust agreement for each of your children (and potentially grandchildren) which take effect on the surviving spouse’s death. The share you leave to each child resides in the trust created for them and protects the assets which reside in the trust from that child’s creditors or ex-spouse. It just depends on the terms you want drafted. Therefore, you designate your trust as the beneficiary of your TOD accounts instead of the children in their individual names.

You can provide peaceful wealth preservation for your family and you don’t have to a Rockefeller or a Gates to afford this type of planning or take advantage of what this kind of estate planning offers your loved ones.