What Happens With Joint Property?

Virtually every estate administration case we handle joint property, or “joint tenancy” as it is sometimes called.  This is most commonly true when the decedent was married, but often occurs when a deceased parent included a child on their bank account or a friend so that “money is available” when something happens to them.  But, joint property can have unintended consequences to your estate, so it is important to understand the different types of joint property according to a recent article titled “Everything you need to know about jointly owned property and wills” from TBR News Media.

This becomes an important issue because depending on the type of joint tenancy, your Will may or may not be necessary to convey it to your beneficiaries. It is also true that using certain types of joint tenancy may bypass your intended estate plan or have tax, government benefits and other consequences, so it is critical to understand the differences and to ensure the type of joint tenancy you are using matches your plan.

Joint Tenancy with Rights of Survivorship. Joint tenancy with rights of survivorship means that there are multiple owners and that upon the death of one, the other owners automatically become the owner of the account.  This process happens by virtue of the titling, and doesn’t require probate to make it happen.  Usually, a death certificate is sufficient to remove the deceased owner.

Most people assume when they see two owners on a bank account that it is owned as joint tenants with rights of survivorship.  In truth, this is something that you elect when you create the account or add a name, and many times bank personnel elects this without discussing it with you.  The best way to determine if your account has rights of survivorship is to check with account card at the bank, although some statements or accounts will also say “JTWROS.”  That is short for “Joint Tenants with Rights of Survivorship”.

Tenancy by the Entirety. This type of joint ownership is only available between spouses and is not used in all states. It definitely exists in Pennsylvania, and is the default way of taking title to real property that is purchased during marriage.  A local estate planning attorney will be able to tell you if you have this option. As with Joint Tenancy with Rights of Survivorship, when the first spouse passes, their interest automatically passes to the surviving spouse outside of probate.

There are additional protections in Tenancy by the Entirety making it an attractive means of ownership. One spouse may not mortgage or sell the property without the consent of the other spouse, and the creditor of one spouse can’t place a lien or enforce a judgment against property held as tenants by the entirety.

Tenancy in Common. This form of ownership has no right of survivorship and each owner’s share of the property passes to their chosen beneficiary upon the owner’s death. Tenants in Common may have unequal interests in the property, and when one owner dies, their beneficiaries will inherit their share and become co-owners with other Tenants.

The Tenant in Common share passes the persons designated according to their will, assuming they have one. This means the decedent’s executor must “probate” the will for the executor to have control of it. Sometimes this is very critical to leave assets as Tenants in Common because you want your portion of an asset to go to a trust or not to the other owner.

In all of these, it is important to recognize that joint tenants are not always necessary.  First, adding a co-owner could affect your estate plan, as is generally described above.  Also, adding a person is a gift, which may have adverse effects on your beneficiary if they suffer a disability, and has gift tax consequences to yourself.  It may also subject “your” money to the creditors of the new owner.

For those who only want “check writing authority,” it actually is possible in Texas to get authority to sign checks only without being an owner, although most banks encourage joint ownership as it is less risky to them.

All in all, it is important to makes sure that the ownership and titling of your assets fits with your estate plan.  A comprehensive estate plan, created by an experienced estate planning attorney, ensures that both probate and non-probate assets work together.

Reference: TBR News Media (Dec. 27, 2022) “Everything you need to know about jointly owned property and wills”

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The Basics of Estate Planning

Every now and again, it’s helpful to go back to the basics.  This blog will go back to the basics of estate planning to talk about how and why everyone should have an estate plan.  Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.

No matter how BIG or small your net worth is, estate planning is a process that addresses how and to whom you leave your assets when you die and names decisionmakers who will wind-up your affairs at death and make financial, medical or personal decisions for you if you cannot yourself.

An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:

  • Your car
  • Your home
  • Financial accounts
  • Investments; and
  • Personal property.

Part of estate planning is deciding which people or organizations are to get your possessions or assets after you’ve died.  This includes determining how to give it to them, and that plan addresses concerns such as marital status of the beneficiary, how they are with money, addiction problems, taxes and so on.

It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.

This is a very important aspect of estate planning, and you can learn more here:  https://galligan-law.com/power-of-attorney-why-it-is-important/

One of the biggest reasons people don’t have an estate plan is they assume they have no “estate” to be concerned with.  It might be true they don’t have much money, but everyone should consider naming individuals to act for them if they become incapacitated, ill or otherwise need help making decisions.

It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, your estate plan also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.

You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.

All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your estate plan covering these three basic areas.

Reference: Forbes (Nov. 16, 2022) “Estate Planning Basics”

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Can a 529 Plan Help with Estate Planning?

Parents and grandparents use 529 education savings plans to help with the cost of college expenses. However, they are also a good tool for estate planning, according to a recent article, “Reap The Recently-Created Planning Advantages Of 529 Plans” from Forbes.

There’s no federal income tax deduction for contributions to a 529 account. However, 35 states provide a state income tax benefit—a credit or deduction—for contributions, as long as the account is in the state’s plan. Six of those 35 states provide income tax benefits for contributions to any 529 plan, regardless of the state it’s based in.

Contributions also receive federal estate and gift tax benefits. A contribution qualifies for the annual gift tax exclusion, which is $16,000 per beneficiary for gifts made in 2022. Making a contribution up to this amount avoids gift taxes and, even better, doesn’t reduce your lifetime estate and gift tax exemption amount.

Benefits don’t stop there. If it works with the rest of your estate and tax planning, in one year, you can use up to five years’ worth of annual gift tax exclusions with 529 contributions. You may contribute up to $80,000 per beneficiary without triggering gift taxes or reducing your lifetime exemption.  Keep in mind that you are just making a lump sum gift, so gifting in the next 4 years to that 529 beneficiary is taxable.

You can, of course, make smaller amounts without incurring gift taxes. However, if this size gift works with your estate plan, you can choose to use the annual exclusion for a grandchild for the next five years. Making this move can remove a significant amount from your estate for federal estate tax purposes.

While the money is out of your estate, you still maintain some control over it. You choose among the investment options offered by the 529 plan. You also have the ability to change the beneficiary of the account to another family member or even to yourself, if it will be used for qualified educational purposes.

The money can be withdrawn from a 529 account if it is needed or if it becomes clear the beneficiary won’t use it for educational purposes. The accumulated income and gains will be taxed and subject to a 10% penalty but the original contribution is not taxed or penalized. It may be better to change the beneficiary if another family member is more likely to need it.

As long as they remain in the account, investment income and gains earned compound tax free. Distributions are also tax free, as long as they are used to pay for qualified education expenses.

In recent years, the definition of qualified educational expenses has changed. When these accounts were first created, many did not permit money to be spent on computers and internet fees. Today, they can be used for computers, room, and board, required books and supplies, tuition and most fees.  They have become fairly expensive.

The most recent expansion is that 529 accounts can be used to pay for a certain amount of student debt. However, if it is used to pay interest on a loan, the interest is not tax deductible.

Finally, a 2021 law made it possible for a grandparent to set up a 529 account for a grandchild and distributions from the 529 account are not counted as income to the grandchild. This is important when students are applying for financial aid; before this law changed, the funds in the 529 accounts would reduce the student’s likelihood of getting financial aid.

If you want to explore more ideas on how to pay for a loved one’s education, see this article:  https://galligan-law.com/how-grandparents-can-help-pay-for-college/  

As a quick aside, contributions to a 529 plan for a child or grandchild are also exempt as transfers under Medicaid.  This means that if you are in a spenddown situation trying to become eligible for Medicaid, contributions to this fund might be very attractive.

Two factors to consider: which state’s 529 is most advantageous to you and how it can be used as part of your estate plan.

Reference: Forbes (Oct. 27, 2022) “Reap The Recently-Created Planning Advantages Of 529 Plans”

 

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