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.