You have probably read that there are plans to help minimize taxes, avoid probate and add convenience to your estate. How the asset is owned or “titled” affects these plans and can yield unexpected results. An asset can be owned by a person:a.) individually
b.) as joint owners without a right of survivorship; and
c.) as joint owners with a right of survivorship.
Options (a) and (b) are “probate assets” which means that when you die your Will determines who inherits the asset. Option (c) are “non-probate” assets which means that the asset automatically transfers to the remaining joint owner(s) at your death. Your Will cannot change the distribution.
1. Tax Planning. Married couples should include a Credit Shelter Trust (a/k/a By-Pass Trust) in their Wills to maximize the benefit of the Unified Credit available to each spouse. By using this device, couples with $1,250,000 combined assets can save approximately $200,000 in taxes. For the Trust device to work, assets must be
non-probate assets. This is unusual for couples, who usually own assets as joint owners with a right of survivorship. The title to assets must be changed to gain tax savings which is a very simple procedure.
2. Convenience. Often a parent will add one child as a joint owner of their accounts “for convenience” to allow access to funds. However, this child is now a joint owner and will automatically receive the funds at the parent’s death. Other children cannot legally share in those assets. The parent’s Will probably treated all children equally. “Titling” changed the plan. Even if the first child gave a share to siblings, there are gift taxes. For “convenience,” use a durable Power of Attorney; not joint accounts.
3. Avoid Probate. In New Jersey, probate is a very simple and quick process. Still, many people fear probate and will gift assets to family and friends while keeping an ownership interest, so as to avoid probate. Thus, they become joint owners. This avoids probate but not taxes; and there can be other complications. There will be taxes on the value of the entire account, unless the survivor can prove his/her contribution. Further, generally, the friend/family will receive the asset and the estate will pay the taxes. Finally, if the friend/family dies first, the donor must prove that it was all his money to begin with to avoid taxes on his own money and the money could be tied up until the friend’s estate is closed.
Kimberly A. Paton is a partner at WJ&L, LLP and the Chairperson of our Estate Planning, Probate and Elder Law practice.