How Do Joint Accounts and Beneficiary Designations Work in Estate Planning?

Most people think a will is the most important tool in the estate planning toolbox, but in many instances, it is not even used. Assets in the will go through probate, and wills control assets in your name only. If you don’t have a will, your state laws will provide one under its law of Intestate Succession. Instead of making a will, some people just name their spouses or children on joint accounts, says the article “Protecting Your Assets: Joint Accounts and Beneficiary Designations” from The Street. however, that can lead to big problems.

Let’s look at a typical family. They own a home, an IRA, life insurance and some bank and investment accounts. They have wills that leave everything to each other, and equally to their children upon their deaths. If a child predeceases them, they want the child’s share to go to the child’s children (their grandchildren). This is called per stirpes, meaning it goes to the next generation. The husband and wife have also listed each other as joint owners and beneficiaries and then listed their children as contingent beneficiaries on all financial accounts.

When the husband dies, all his assets go to his wife. When she dies, she had named her living children as beneficiaries. If she signed a quit claim deed putting the children’s names on the house before she died, the will and probate may be bypassed altogether.

Sounds like a great plan, doesn’t it? Except like most things that sound too good to be true, this one is not a great plan. Here’s what can and very often does go wrong.

Let’s say a daughter inherits a bank account and is sued, files for bankruptcy or divorces. Her entire inheritance is vulnerable, with no protection at all.

What if you say in your will that you want everything to go equally to all three children when you die, but you only put one son as a beneficiary on your accounts? When you die, only one son inherits everything. The will does not supersede the beneficiary designation. If the son wants to keep all your assets, he can, no matter what he may have promised you and his siblings.

If the wife dies first and the husband remarries, he may want to leave everything to his new wife. He’s hoping that when she dies, she’ll distribute the assets from his first marriage to his children. He even has a will and changes the beneficiary designations on his investment accounts to make sure that happens. However, when he dies, she owns the accounts and can name whoever she wants to inherit those accounts. She has the legal right to cut out anyone she wants. The husband may have avoided probate, but his children are left with no inheritance.

We all like to believe that our spouses and children will do the right thing upon our death, but the only way to ensure that this will happen is to have an estate plan created using trusts and other planning strategies. Avoiding probate may be a popular theme but making sure your assets go where you want to them to is far more important than avoiding probate. Meet with an estate planning attorney to ensure that your family is protected, the right way.

Reference: The Street (Oct. 30, 2020) “Protecting Your Assets: Joint Accounts and Beneficiary Designations”

What Do I Need to Know About Owning Property with Someone Other than My Spouse?

Have you ever considered owning property jointly with a family member, friend, or a business associate? Inside Indiana Business’ recent article, “Risky: Property Owned with a Non-Spouse,” says that you should think about the negatives, such as loss of control, unknown creditor issues and tax consequences.

Loss of Control. When you choose to co-own an asset with another person, you can enter into a legal ownership agreement known as “joint tenants with rights of survivorship” or “JTWROS.” When one of the owners dies, the surviving owner automatically becomes sole owner of the property. However, you give up some control of ownership, when you own property in this way. For example, you can’t direct your portion to go to a spouse or a child after your death in your will or other estate planning documents. OK, you can, but your co-owner’s ownership title takes precedence over your estate documents. As a result, she will become the sole owner. You can also lose some control over the property, if the non-spouse co-owner transfers her interest in the property to another individual without your consent. It’s also tough to remove a co-owner from the property title without his or her full cooperation.

Creditors. Another issue with jointly held property is that it’s subject to creditors’ claims against both owners. If your brother, as a co-owner of your cabin, has financial troubles and files for bankruptcy, his ownership in the cabin could possibly be claimed by a creditor. He could also be forced to sell it to pay off his debts. So, unless you can buy out his ownership in the cabin, you may now own the property with a stranger.

Potentially Higher Taxes. Adding a non-spouse as co-owner of an asset, allows for a simple property transfer at your passing. However, it could also mean both a gift tax to you and an increased capital gain tax for your heir. By adding a non-spouse to the property title, you’re making a gift to the new joint owner. Therefore, based on the current value of the property being gifted, you could be liable for gift tax. In addition, the heir of the property may have to pay increased capital gain taxes. Property transferred at death receives a step-up in basis. This means the heir’s cost basis is equal to the fair market value of the property at your death, instead of your cost basis (the amount you paid for the property). Receiving a step-up in basis reduces the heir’s capital gain on the appreciation of the property when it’s sold. However, if you add a co-owner, only your interest in the asset has the benefit of stepped-up basis at your death, not the entire property. When the property is sold, this may mean a higher capital gain tax.

JTWROS vs. Tenants in Common. When deciding to co-own an asset with another person, you can also enter into an ownership agreement known as “tenants in common.” Here’s a key difference: holding property JTWROS with another person means that when one owner dies, the other owner receives the property outright and automatically. When owning property as tenants in common with another person, when one owner dies, the owner’s heirs receive his share in the property. A co-owner can again transfer his interest in the property without approval as the other co-owner. This loss of control may place you in a difficult position.

When considering property ownership with another party, look at the pros and cons of both JTWROS and tenants in common. The cons usually outweigh the pros. However, if owning property with a non-spouse is what you want, discuss this with a qualified estate planning attorney.

Reference: Inside Indiana Business (December 1, 2019) “Risky: Property Owned with a Non-Spouse”

Have Your Will Done? Be Aware, That’s Not An Estate Plan~

A last will and testament is an important part of an estate plan, and every adult should have one. However, there is only so much that a will can do, according to the article “Estate planning involves more than a will” from The News-Enterprise.

First, let’s look at what a will does. During your lifetime, you have the right to transfer property. If you have a Power of Attorney, or POA, it gives someone you name the authority to transfer your property or manage your affairs, while you are alive. In most states, this document expires upon your death.

When you die, a will is used to transfer your property, according to your wishes. If you do not have a will, the court must determine who receives the property, as determined by your state’s law. However, only certain property passes through a will.

Individually owned property that does not have a designated beneficiary must be transferred though the process of probate. This includes real property, like house or a land, if there is no right of survivorship provision within the deed. The deed to the property determines the type of ownership each person has.

Couples who purchase property after they are married, usually own the property with the right of survivorship. This means that the surviving owner continues to own the property without it going through probate.

However, when deeds do not have this provision, each owner owns only a portion of the property. When one owner dies, the remaining owner’s portion must be passed through probate to the beneficiaries of the decedent.

Assets that do not have a designated beneficiary do not pass through probate, but are paid directly to the beneficiary. These are usually life insurance policies, retirement accounts, investment and/or bank accounts. Your will does not control these assets.

Beneficiaries through the will only receive whatever property is left over, after all reasonable expenses and debts are paid.

If you wish to ensure that beneficiaries receive assets over time, that can be done through a trust. The trust can be the beneficiary of a payable-on-death account. A revocable trust avoids property going through the probate process and can be established with your directions for distribution.

A will is a good start to an estate plan, but it is not the whole plan. Speak with an estate planning attorney about your situation and they will be able to create a plan that addresses distribution of your assets, as well as protect you from incapacity.

Reference: The News-Enterprise (September 30, 2019) “Estate planning involves more than a will”