Will Your Estate go to Your Desired Beneficiaries?

Posted on April 22nd, 2009 in Newsletter Articles, Estate Planning by wayne

It appears likely that the individual federal estate tax exclusion will remain at least $3.5 million after 2009. If this occurs, most Americans will no longer need to worry about estate planning techniques such as bypass trusts, marital trusts, etc. With this change, you may think that estate planning is no longer necessary. If so, think again. Regardless of your wealth, without proper planning, your estate may not go to your desired beneficiaries. Here’s how this might occur.

Over the past several years, you and your spouse have successfully built a portfolio of investments. As your house has grown in value and the mortgage principal has declined, you also have a significant amount of equity in your home. To avoid the complications of probate, you have been advised to title your house, your brokerage accounts and your savings accounts in Joint Tenancy with Rights of Survivorship (JTROS). JTROS serves as a “Will substitute” and allows property to pass to the surviving spouse outside of probate.

You and your spouse want your children to inherit the fruits of your labor. Your wills make this decision very clear. Since your total estate is below $3.5 million, you are convinced that your estate planning is complete.

Unfortunately, your children may receive none of these JTROS assets when the second spouse dies. With JTROS, when the first spouse dies, the surviving spouse receives complete ownership and control of the property. The surviving spouse may remarry and put the property into JTROS with a new spouse. If your surviving spouse predeceases their new spouse, the new spouse receives total ownership and control of the house and all of the remaining assets, regardless of what is stated in the deceased’s Will.

To avoid an outcome that neither you nor your spouse wish, pay close attention to how your property is titled. To assure that your children will receive at least a portion of any remaining assets at the second spouse’s death, you can own your investments accounts individually or put them in individual living trusts. It may also be wise to own your house as Tenants in Common (TIC).

With TIC, each spouse typically owns an equal share of the house and has an undivided right to use the property. However, when one spouse dies, the deceased spouse can designate in their will who inherits their interest in the property. You could have your TIC property go into a trust. The trust can allow the trustee to provide income and even principal from any assets to be used to support your surviving spouse. When the house is sold, your 50% of the sale proceeds would go into the trust. When the surviving spouse dies, the remainder of the trust could pass on to your children.

If all of your property is currently titled as Joint Tenancy with Rights of Survivorship, you and your spouse should have a discussion about the pros and cons of this approach. If you decide that this does not accomplish your objectives, meet with an estate planning attorney and discuss the options available that will meet your estate planning goals.

Estate laws are complex. However, changing how property is titled is a simple and low cost procedure. Be sure that you address how your property is titled when you do your estate planning. If you don’t, your estate may never reach your desired beneficiaries.

The Risks of Joint Tenancy

Posted on October 29th, 2007 in Estate Planning by wayne

Joint Tenancy with Rights of Survivorship, commonly call JTROS, is considered a “will substitute.” When you own property in JTROS, you own an undivided equal interest in the property with the other joint tenant(s). If an owner dies, the property passes to the surviving owner(s), without going through the deceased’s probate estate.

Many people use JTROS ownership to keep property out of the slow and often costly probate process. When a JTROS property owner dies, the remaining owner(s) has immediate access to the property and can use it or sell it at his/her discretion. The ability to avoid probate and to provide your surviving spouse with immediate access to the JTROS property makes this a very popular form of ownership between spouses.

Some of the risks associated with JTROS ownership are estate planning risks. Since the JTROS property passes outside of the deceased’s estate, it cannot be used to fund a “Bypass Trust” or any other type of estate planning device.   If the JTROS property is owned by a married couple, ½ of the value of the property is included in the deceased spouse’s estate.  If the other owner is not a spouse, the full value of the property is included in the deceased’s estate, unless the other owner(s) can prove that they contributed to the purchase of the property.

Other risks, associated with JTROS property, come from the fact that the owners have an “undivided equal interest” in the property. As described in detail in Financial Abundance Guide, this type of ownership can lead to unintended consequences. A lien can be placed on the property by one of the owners, without your knowledge. The property can also be sold and all of the funds taken by one of the JTROS owners, even your spouse. Finally, since JTROS property passes outside of probate, any disposition of the JTROS property that is included in your will is ignored.

Own property with your spouse in “tenancy by the entirety” instead of JTROS, If your state provides for this type of ownership. With “tenancy by the entirety,” you and your spouse must jointly consent before the property can be sold or gifted.

There are many situations where joint tenancy with rights of survivorship may be the best form of property ownership. However, it is important to understand the risks associated with using JTROS property ownership as a “cure all” for estate planning.

Estate Planning Using Roth IRAs

Posted on September 10th, 2007 in Estate Planning by wayne

Did you know that Roth IRAs are a great Estate Planning tool?

Most people know that contributions to a Roth IRA can grow tax free and provide tax-free withdrawals. This tax free growth can often provide better after-tax returns than a traditional IRA, depending upon your present tax bracket and what your tax bracket will be when you turn 70 ½.

You may not be aware of all of the following additional differences between a Roth IRA and a traditional IRA:

  1. If you file income taxes jointly and you and/or your spouse are covered by a company retirement plan, you and your spouse can each contribute $4,000 ($5,000 if you are over 50) to a Roth IRA, as long as your Adjusted Gross Income (AGI) is under $156,000 ($99,000 if you are single).
  2. As long as you have earned income and your AGI is under the maximum amounts allowed, you may contribute to a Roth IRA, regardless of how old you are.
  3. You are never required to take distributions from a Roth IRA.
  4. When you die, your Roth IRA beneficiary may roll over your Roth IRA into an inherited Roth IRA. The beneficiary will be required to take annual distributions based on their life expectancy, with the remaining assets growing tax free for as long as they live.
  5. In 2010, Adjusted Gross Income restrictions on converting IRAs to Roth IRAs are eliminated. While you pay taxes on the converted amounts, if you pass your Roth IRA assets to a younger heir, the total tax savings could very significant.

If you are in a position to pass some of your assets to your children or grandchildren, passing Roth IRA assets can provide many years of tax free income and growth to your beneficiary. Be sure to discuss this approach with your Estate Planning attorney.