You might be surprised to learn that many Estate Planning goals can be accomplished without wills and trusts.
In fact, using other tools can spare you some of the expense and complications of wills and trusts.
These estate planning strategies also cause the assets to avoid the delay and expense of probate, transferring the title of each asset automatically to the person you intended.
But these estate planning strategies can also have some disadvantages that you have to consider before using them.
You’ll still need a will, and a trust or two could be the better way to accomplish some of your goals. But many assets can be transferred to your intended heirs free of the probate process and the expense of trusts.
The best estate planning strategy depends on the type of asset involved and whom you’d like to inherit it.
Of course, you can establish a joint title, also known as joint tenancy with right of survivorship.
When a non-spouse is the co-owner, however, joint tenancy might create problems.
Creating joint tenancy with another person often means you’re making a gift of half the property to the person. You might have to file a gift tax return and use part of your lifetime estate and gift tax credit.
Also, both owners have to act together in any future transactions involving the property or give powers of attorney to each other.
Many older people create joint tenancy financial accounts or other assets with an adult child or a friend.
They do this to make managing their daily affairs easier or so that someone can pay the bills if they become incapacitated.
Of course, one potential problem is that sometimes the new joint owner spends or invests the account without the original owner’s knowledge.
Also, this arrangement makes the joint tenant full legal owner of the property after the other owner passes away, and that can create disputes with family members about what was intended.
A joint owner can break the joint tenancy at any time by transferring his or her share of the property to another owner.
The consent of the other owner isn’t needed in most states. The transaction creates a tenancy in common between the new owner and the remaining joint owner with no right of survivorship.
Joint tenancy also means the surviving owner might not be allowed to increase the tax basis of the entire property to current fair market value after the other owner passes away.
Increasing the basis of the property saves substantial capital gains taxes when property has appreciated. The capital gains taxes might be higher than the cost of probate.
Tenancy in common is another way of owning property with another person. It has many of the problems of joint tenancy. (Plus, when one owner dies, the other doesn’t automatically get full legal title to the property.)
Whether the intended beneficiary is a spouse or non-spouse, there usually are better ways to avoid probate and transfer property to the next owner than joint ownership or tenancy in common. The better choice depends on the type of property.
About 26 states allow married couples to own property in a form of title called tenancy by the entirety.
Some states limit that form of title to real estate while others allow it for at least some other assets.
In tenancy by the entirety, the spouses own the property together. Legal title passes to the surviving owner automatically on the death of the other owner without probate.
Another benefit of tenancy by the entirety is that the property is subject to the claims of creditors only for debts that are the joint responsibility of both spouses.
Creditors of only one spouse can’t claim any part of property held as tenants in the entirety.
Also, neither spouse can transfer any rights to the property or break the tenancy by the entirety acting alone. Both spouses have to agree to sell or give the property.
Tenancy by the entirety is not available in community property states. They have a form of title among married couples that is very similar, known as community property with right of survivorship.
Details vary among the states. In some community property states, one spouse may unilaterally terminate the right to survivorship.
In next week’s issue, we’ll review more ways to avoid probate and transfer property, such as the Payable on Death (POD) bank account.
You can check out Part 2 of this article here.