One thing that requires close attention when doing estate planning, but little attention is paid to it, is the way we hold title to our assets. How we own our assets is a key component to estate planning that is often overlooked. Attention to property ownership detail can make the difference between estate planning success or failure.
For instance, spouses often hold property in joint tenancy with the right of survivorship. That right of survivorship is part of your estate planning. When one spouse passes, the surviving spouse will become the sole owner of that jointly-owned property. The same is true for joint tenants who are not spouses.
A Will does not affect property owned in joint tenancy. When a joint tenant dies, the surviving joint tenant becomes the sole owner of the property, regardless of what the Will provides. Between spouses, it usually makes no difference: Wills usually leave “all to spouse” anyway; so, it makes no difference whether the surviving spouse becomes the sole owner by survivorship or devise (by the Will).
Consider, however, a parent of two children, who adds one child to title to her house as a joint tenant for some reason (like to use the child’s credit to obtain a mortgage). If she prepares a Will leaving her estate to both children, forgetting (or not realizing) that the house will go to the child who is the surviving joint tenant, her planning goals will not succeed. If the goal is for the estate to be divided equally between the children, the joint tenancy will frustrate that goal.
A more common example involves the addition of a name to a bank account. Parents often add children to their bank accounts as they get older. Sometimes this is done to enable the additional person (like an adult child) to write checks and pay bills. The child becomes a co-owner of the account when this is done, and the added person will become the sole owner of the account when the original account holder dies, even if that was not the intention.
People sometimes tell me that they have done similar things because the trust the child, and they know the child understands that he/she should share the asset with his/her siblings. Even if that is the case, the asset becomes the child’s own asset when the parent dies. Any distribution of the asset among siblings is considered a gift from the child who becomes the owner. Gift tax returns should be filed for any transfer over $14,000.
Many times, however, the intentions of the parent do not win out. The child who was favored with the ownership if the account or other asset decides, for whatever reason, that they do not need to share. I get calls every month from someone whose sibling became the owner of the parent’s account or house or other assets and will not share. I have to tell the caller that there is probably nothing that can be done. If they want to challenge the sibling’s actions, it will cost thousands, and many tens of thousands, of dollars in legal fees. The parent probably did not intend that result, but they did not do appropriate estate planning to ensure that their intentions were carried out.
Further, the transfer of appreciable property during life (like a house or other real estate, or investments) fails to take advantage of the step up in basis that is realized when assets transfer on death. Assets transferred during life result in carry over basis, meaning that the basis of the giver becomes the basis of the recipient.
For instance, if mom bought her house for $50,000 in 1970 and does a quit claim deed to put daughter on title to her house in 2010, the basis in the house is $50,000 for both of them. If the house is worth $150,000, they will have to pay capital gains on $100,000. What is worse is, if mom dies, and daughter never lived there, daughter will not have the residential house sale exemption to negate the capital gains.
If mom had left the house to her daughter in her Will, the daughter would receive the house with a step up in basis, meaning that the basis becomes the value of the house on the date of mom’s death. The basis, then , would be $150,000, and the daughter would have no capital gains when she sells the house.
Spouses should pay attention to who owns what (and what is in who’s name) and think through whether it makes sense to keep title as it is or change title in harmony with the intentions of the estate plan. This may be important when spouses are not leaving all to each other, but dividing assets between surviving spouses and children of another marriage.
How we own assets, including any beneficiary or payable on death designations, may work with or against the goals of the estate planning and should be examined as part of the estate planning process. When the estate planning is being done, it is a good time to take an inventory of these things and to make any changes that make sense.