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.

You Need These Medical Documents In Your Estate Plan

While a Trust or a Will handle the financial aspects of your estate upon your disability or death, you need two specific medical documents as part of your estate plan should medical matters arise and you can’t make your wishes known consciously to your family or your doctors.

The first document is called an Advance Medical Directive.  In an Advance Medical Directive, you decide who will be your agent to make medical decisions for you should you be unable to do so.  There will also be “death with dignity” provisions, so your loved ones know your wishes regarding end-of-life decisions.  Also, you will have an organ donation option.

The other medical document you should have in your estate plan is often referred to as a HIPPA Release.  Congress passed a healthcare privacy act several years ago.  Its aim was to make it harder for third parties to gain access to our private medical records.  Unfortunately, a consequence of this act has been that some hospitals will not let your loved ones talk to your doctors or gain access to your medical files without a signed authorization from you.  This HIPPA release is that signed authorization.

By having these documents already in your estate plan, you can ensure your family and doctors know your wishes on medical matters should you become unresponsive during hospitalization or when you face a terminal illness.

Congress Provides Some Relief for Special Needs Beneficiaries

Congress Provides Some Relief for Special Needs Beneficiaries

By passing the ABLE (Achieving a Better Life Experience) Act last December, Congress has provided some financial relief for families with special needs children.  Children who suffer developmental disabilities often qualify for government benefits that provide financial assistance well into adulthood.  However, to qualify for these government benefits, a recipient usually must own less than $2,000 in assets.  Therefore, significant direct inheritances from parents or grandparents could jeopardize the government benefits a special needs child is otherwise entitled to receive.  Typically, the only was such a beneficiary could inherit any significant wealth was for their family to have a special trust established for the child, where that child is only a beneficiary of the assets (child has neither ownership nor management of such assets) and the assets are for that child’s supplemental needs beyond what’s provided by government benefits.

The ABLE Act, however, provides families with a bit more flexibility for special needs beneficiaries. Under the new law, a tax-favored savings account can be established for a disabled child or adult who became disabled before age twenty-six.  Up to $14,000 per year can be sheltered in this account and anyone can contribute to it.  Additionally, the first $100,000 in the account would not count as an asset of the beneficiary in considering eligibility with government programs such as SSI (Supplemental Security Income).

The money in the account is to be used for “disability-related expenses.”  But that term is broadly defined to include such expenses as education, housing, transportation, employment; healthcare, financial management and administrative services; legal fees and funeral and burial expenses.

It is anticipated that this account will be managed by the states in a manner similar to the 529 College Savings Plans and will be available to the public by 2016.

Why It’s Called a Trust Fund

Why It’s Called a Trust Fund

By Richard E. Phillips

Creating a Trust is a two-step process. The first step is creating and signing your Trust Agreement, the private contract between you as creator of your Trust and your Trustee (sometimes also you).  Your Trustee manages the Trust according to the terms of your Trust Agreement.

But that’s only the first step.  The second and critical step in the Trust process is retitling assets into your Trust or designating the Trust as a beneficiary of an asset upon your death.  This process of re-titling assets into the name of your Trust is oftentimes called “funding” the Trust.  Funding is critical to your Trust working as you desire.  Because a Trust without assets funded into it is a worthless piece of paper.  Below by section is a description of how some common types of assets are re-titled into your Trust.


Real Estate

Your real estate is funded into your Trust by having a new deed drafted that conveys title from you to the Trustee of your Trust.  What if there is a mortgage on the property?  Do you need the lender’s permission to fund it into your Trust?  The simple answer is ‘no’ for residential real estate, but ‘probably’ for commercial real estate and multi-unit dwellings.  Federal law allows individuals to convey a real estate interest into a Trust without triggering the mortgage’s “due-on-sale” acceleration clause.  The plain language of the law reads “real estate.”  However, lenders usually interpret that to mean only “residential real estate.”  Prudence suggests getting the lender’s pre-approval for funding commercial or multi-unit real estate into your Trust.

What if you own your interest partially with other persons?  If you own your interest as tenants-in-common, this means each person owns a separate share that can be conveyed separately.  Therefore, you can convey your interest in the property into your Trust by quitclaim deed without affecting the interests of the other property owners.

If you own real estate with another person as joint-tenants-with-right-of survivorship, however, this means you don’t own separate shares of the property.  Each joint owner has a 100% stake in the property.  When the first person dies, the whole value of the property conveys to the surviving owner.  You would need to get the other joint owner’s written permission, usually by a new deed, to break the “right-of-survivorship” provision in the current deed in order to convey your interest into your Trust.

Bank Accounts & Certificates of Deposit

The transfer of Bank Accounts, Savings Accounts and Certificates of Deposit (CD’s) into your Trust can be accomplished by providing your bank with a copy of the Certificate of Trust which your estate planning attorney has prepared for you. The Certificate of Trust is a 3-4 pages summary of your Trust Agreement and allows you to fund your Trust without having to give a financial institution a copy of your whole Trust Agreement.  You will then sign new signature cards as Trustee of your Trust. Generally you will not have to open new accounts to replace existing accounts; the only change is on the bank signature cards. For a checking account, you generally do not need new checks.

You can fund your credit union accounts into your Trust.  However, most credit unions require that the master account remain in your individual name, but your sub-accounts can be re-titled into the name of your Trust.

When you open up new accounts, simply instruct the bank that you wish to have the title of the account in the name of your Trust. You may need to provide the bank with a copy of the Certificate of Trust.

Brokerage & Mutual Fund Accounts

For a standard brokerage (and/or a mutual fund) account, all that is generally required is a request to the broker or account manager. The financial institution usually will require a copy of the Certificate of Trust.

Stocks & Bonds

To transfer stocks or bonds into the name of your Trust, a different procedure is used for privately held stock compared, such as stock in a family-owned business compared to publicly-traded stock.

  1. Privately Held Stock

The transfer of privately held security instruments, such as stocks in a privately held corporation, can be accomplished simply by surrendering the existing stock certificates and having new stock certificates prepared in the name of the Trust. This normally does not require a permit from a state agency, nor does it usually have any type of adverse tax consequence. However, the transfer of stock in a privately held corporation normally requires the approval of the corporation. Typically, such consent will be granted by the corporation after it has reviewed the Certificate of Trust and the appropriate assignment documents have been executed. Shares of individual professional corporations are usually not transferred to trusts because of statutory restrictions.

  1. Publicly Held Stock

In the case of publicly held stocks or bonds, it will be necessary to work through a stockbroker or through the institution from which the assets were purchased (such as a Dividend Reinvestment Plan or an Electronic Registration Plan). If you currently possess the certificate(s), the broker will require you to surrender the certificate(s) and sign certain transfer documents. Physical certificates should always be sent certified mail.  However, electronic dividend reinvestment accounts are much easier to transfer and usually require a written request and a copy of your Certificate of Trust.

Life Insurance & Annuities

If you wish the proceeds of your life insurance policies or annuities to be distributed in the same manner as the other trust assets (which is usually the case), the Trust should be the beneficiary. You must instruct each insurance company or your insurance agent to designate your Trust as the beneficiary.

IRAs, 401(k)s & Pension Plans

An IRA, 401(k) plan or pension plan, wherever invested, must remain in the owner’s name and Social Security number; this is not a major problem in estate planning since the account is paid, at your death, to a named beneficiary and, thus, does not have to go through probate. However, it may be desirable to have the account paid to your Trust instead of to a named beneficiary (e.g., the beneficiary is a minor or the Trust has more details for all contingencies); For a husband and wife, the non-owner spouse is usually named the primary beneficiary and the Trust may be named the contingent beneficiary. Any change of a beneficiary designation of a retirement plan could have important income tax consequences; therefore, you should consult with your tax advisor prior to making any change.

Personal Property & Motor Vehicles

Personal property such as furniture, household effects, art work, jewelry, automobiles, RVs, boats, etc. should be transferred to the Trust. Your estate planning attorney should draft an “Assignment of Personal Property” document.  This document assigns all of the above-mentioned personal property into your Trust. This Assignment covers not only the property you currently own but any additional personal property acquired up to the date of death. 

Limited Liability Companies

A trust can be a member of a limited liability company (“LLC”). The transfer of a LLC interest to a Trust may require the approval of the LLC. Typically, such consent will be granted by the LLC after it has reviewed the Certificate of Trust and the appropriate assignment documents have been executed.

If you acquire any future LLC interest, simply instruct the LLC that you wish to hold title in the name of your Trust. You will probably need to provide the LLC with a copy of the Certificate of Trust.

Durable Powers of Attorney: The Power of Trust

Durable Powers of Attorney: The Power of Truststock-photo-11173640-closeup-of-pens-and-paper-while-business-people-discuss-reports[1]

by Richard E. Phillips

What Is It?

A Durable Power of Attorney, sometimes called a Financial or Property Power of Attorney, is a useful and powerful document in your estate planning portfolio.  This document appoints your agent to handle any matters it’s entitled to under the terms of the document, subject to state and federal laws.  Typically, your agent is granted the authority to do all things you would do acting on your own behalf.  There are exceptions under the law, such as voting on your behalf or serving on a jury.  Historically, a Durable Power of Attorney was used due to a person’s unavailability.  If someone was going to be out of town or out of the country for an extended period of time, that person would appoint an agent through this document to handle their financial affairs while they were gone.

Durable Powers of Attorney are still used in this manner today, most often by military couples because a service member will be deployed overseas.  But over the last several decades, this document has been used mostly in the realm of incapacity.  A person (the principal) becomes mentally incapacitated and has appointed an agent to handle his or her financial affairs during the time of mental incapacity, whether temporary or permanent.

Why Have It?

The reason this document should be included in your estate plan is because you want someone of your own choosing managing your financial affairs for you should you become incapacitated, instead of someone chosen by your local probate court through a guardianship/conservatorship proceeding.  That’s right!  If you have not designated who will manage your financial affairs in case of your mental incapacity, the probate court will choose someone for you.  And it may be someone you would never have intended to control your estate.  The process for choosing your conservator to manage your financial affairs for you due to your mental incapacity is popularly known as “living probate.”

Living probate can be a living nightmare for your family.  It is a humiliating process where you are publicly declared incompetent by a court of law.  The probate court decides who will manage your affairs, not you and not your family.  The court process involves aggravating paperwork, delays and expenses.  Such expenses include probate fees, attorney’s fees, and accounting fees.  Once your conservator has been appointed by the court, you have to go through the further indignity of having your conservator being required to provide an annual accounting to the probate court on how your finances have been managed.

If you have an estate plan built around a fully-funded revocable living trust, the successor trustee you appointed in your trust agreement can take over your estate upon your mental incapacity according to the terms of your trust, thus avoiding living probate.  A Durable Power of Attorney should still be drafted in case an asset was not funded into your trust before your incapacity.  Then, the agent of your power of attorney can manage that unfunded asset for your and usually has the power to fund that asset into your trust for your behalf.  However, if you have estate plan built around a will or no estate planning documents whatsoever, you must have a properly drafted Durable Power of Attorney document in order to avoid living probate.


When Can the Power Exist?

You can decide in your document when the agent of your Durable Power of Attorney has the power to handle your affairs.  Your choices are typically either (1) immediately upon your signing of the document or (2) a “springing” power, meaning your agent cannot handle your affairs until a condition is met, such as proof of your mental incapacity according to a letter from your physician.   I know that it sounds like a no-brainer that latter option is advisable, but in my opinion the reverse is more often true.  The reason being, this document is typically used on an emergency basis, your mental incapacity or you’re at least temporarily unable to handle your own affairs due to a medical emergency.  If your loved ones have to wait for a physician’s letter (which he or she doesn’t have to write) before your affairs can be handled for you, then it could be a costly wait, or at the very least, an unnecessary hassle for your family during a stressful time.

We hear the occasional horror story of someone being cleaned out because they appointed the wrong person as their agent.  However, we hear these stories because they are a rare occurrence.  If you’re married, your first agent will likely be your spouse.  Most other times it’s one of your children or a trusted friend.  If they have the immediate power on paper, in practice they can handle your financial affairs immediately and seamlessly if something happens to you that leaves you unable to handle your own affairs.


A Durable Power of Attorney is a necessary part of your estate planning portfolio because it can spare your family heartache, hassle, and expense if you have decided ahead of time who will manage your finances upon your possible mental incapacity.