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  Don’t let the term “tenancy” fool you. Tenancy and tenants in this context has nothing to do with renting or being a tenant: It refers to joint ownership.

  You can add a person (tenant) or persons (tenants) to the account before your death. Make sure the joint account includes survivorship rights. Most states will probate regular joint accounts. This gives all parties access to the account.

  In end of life situations, it allows a loved one to pay bills and make deposits on behalf of their joint tenant. No gift is made by adding a tenant(s) unless that added tenant withdraws assets for their own purposes. Once the original tenant passes, the account won’t be probated, and assets pass to the surviving tenant(s).

  Obviously, this could create problems. That other tenant could clean the account out without your consent, or assets could be targeted by your co-tenant’s debtors. However, in some situations it’s the easiest and best solution.

  Rights of Survivorship and Real Estate

  Rights of survivorship can also be created with real estate, like your primary residence, secondary residence, land, or income property. By adding a joint tenant(s) with survivorship rights to the property’s title, probate can be avoided.

  If you’re married, a more desirable option may be community property with the rights of survivorship or tenancy by the entirety. It’s dependent on your state of residence and whether you live in a community property or non-community property state. (See Community Property vs Common Law States in Part II for more details.)

  Deciding how you want to “take title” to real property, or whether you want to change your current ownership designation for estate planning purposes, are important decisions. Unless you’re fully versed in all the ownership options available in your state and clearly understand all the ramifications, it’s best to consult with an experienced attorney licensed in your state of residence on these matters.

  Example 3: Joint Tenancy with the Rights of Survivorship (Favorable)

  Remember Colette and her daughter Heidi from the previous example? If you recall, Heidi watched helplessly as her deceased mother’s house, which she bequeathed to Heidi through her will, had to be sold to pay Colette’s probate fees. How could this catastrophe have been averted?

  Earlier, assuming Colette lived in a state that allows the transfer of real estate through a beneficiary deed (TOD for real estate), we identified one way.

  Another way would have been for Colette to change her sole ownership in the property to joint tenancy with the rights of survivorship with Heidi. The property would have avoided probate and passed directly to Heidi upon Colette’s death.

  By making that ownership change, Collette is gifting half of her house to Heidi, but as long as Collette hadn’t made any previous substantial gifts there would be no adverse consequences, tax or otherwise, for Collette’s estate. Upon Collette’s passing, her half of the house passes directly to Heidi without going through probate.

  Property titled with survivorship rights, unlike tenants in common, provide equal and undivided ownership. Regardless of the number of tenants, ownership is equal. Two tenants means each owner owns one-half of the property, three tenants equals one-third ownership each, and six tenants equals one-sixth ownership.

  When a tenant passes, their ownership reverts equally to the surviving tenants without going through probate: One-quarter ownership reverts to one-third; One-third to one-half; One-half ownership to sole ownership.

  Adding a tenant and creating ownership with survivorship rights during your lifetime is a legitimate will substitute and keeps your property out of probate.

  Joint tenancy with the rights of survivorship could have been a great solution for Collette and Heidi, but it can be undesirable in other situations.

  Example 4: Joint Tenancy with the Rights of Survivorship (Unfavorable)

  Remember widower Sean and his three kids? Let’s assume he also owned a $500,000 townhome. Hearing of Collette and Heidi’s plight, he goes down to the appropriate government office with the proper paperwork and for a small fee changes his sole ownership to joint tenants with the rights of survivorship with his three kids.

  What if Sean wants to move or refinance after making that change? As of the paperwork filing, Sean made a gift of one-fourth of the townhome to each of his three children, so he now owns only one-quarter of the townhome. He’d have to get permission from his three co-owners of the property before making any move. There is also the danger of a lien or other encumbrance being levied against the property if one of Sean’s progeny runs into financial trouble.

  Upon Sean’s death, his one-quarter ownership avoids probate and passes equally to his three kids, giving each of them one-third ownership. What do they do now? Each is one-third owner.

  Do all three kids and their families move into Dad’s two bedroom townhome and live happily ever after? What if two of the kids want to sell and the other one doesn’t?

  Even if they all did decide on selling, there could be a big time tax bill lurking because of Sean’s estate planning choice.

  Gifts and Cost Basis

  Another downside to adding joint tenants with the rights of survivorship has to do with capital gains tax and basis if the surviving tenant(s) sell the property. Basis is the original purchase price plus any capital improvements made during ownership.

  It’s a property’s basis that is subtracted from the selling price that determines the amount of capital gains tax owed.

  Real property bequeathed through your death, whether through a will or a will substitute, enjoys what is known as “stepped-up basis.” This can be of tremendous advantage to your beneficiaries, especially when dealing with highly appreciated assets.

  The basis of the property gets stepped-up to the market value of the property at the time of your death, and your beneficiary uses that new basis for tax purposes if they sell the property. With gifts, the recipient assumes the donor’s original basis.

  Example 5: Gifting Highly Appreciated Assets

  Let’s say all three of Sean’s kids agree to sell his townhome after his passing. Because Sean gifted the property (except for his one-fourth ownership) to his kids during his lifetime, they assume his original basis in the property for tax purposes. Only Sean’s one-fourth ownership will get stepped-up upon his death: Each kid’s basis remains at Sean’s original basis.

  Let’s say Sean paid $80,000 for the townhome twenty years ago and made $20,000 of capital improvements over the years, making his basis $100,000. When Sean made his kids joint tenants, each assumed their part of this original basis, or $25,000 each (100,000/4), as well as assuming one-fourth ownership.

  If Sean’s kids sold the property, post-Sean, for $500,000, each would owe capital gains tax on a six figure capital gain. Sean could have prevented those tax bills by bequeathing the house to his kids through his will or a will substitute. Then the kids get the stepped-up basis, and assuming the market value of the house didn’t change between Sean’s death and the sale, no capital gains tax would be owed.

  Even though Sean’s house would enjoy a stepped-up basis by bequeathing it through his will, it would still have had to go through probate, which as outlined could have its own set of negative consequences.

  If there is a single inheritor and the basis of a property isn’t much lower than the market price, or the inheritor (like Heidi) has no intention of selling the property during their lifetime, using joint tenancy with the right of survivorship can work. Otherwise, a will substitute like a living trust is often the better alternative.

  Living Trusts

  I like to call living trusts the Grand Momma of estate planning because they usually offer the best solution for many estate planning objectives. Like other will substitutes, assets transferred upon death through a living trust enjoy a stepped-up basis and protection from probate, but a living trust affords you the ability to literally control those assets from the grave.

  Controlling from the grave sounds a bit ominous and even evil, bu
t it may be prudent for you to do so. Young adults often are careless with large sums of money, for instance. Think of it as protecting your beneficiaries from themselves.

  Plus, you can continue to be a pain in the ass, even after your dead!

  There are lots of trusts available for different purposes, but a living trust is the most common type of trust. A living trust is often the only type of trust in an estate plan, or acts as the backbone of a more elaborate plan from which other trusts are created.

  Weigh the costs associated with creating and managing a trust with its effectiveness and convenience. The cost for creating an attorney drawn trust starts at around fifteen hundred dollars and goes up from there, depending on its complexity. Additional charges may occur for revisions and management.

  Your estate planning objectives may be met by using other less expensive will substitutes.

  A Legal Trick

  A living trust is nothing more than a legal trick. First, the trust must be created. This is best done through an attorney licensed in your state of residence who is experienced in these matters.

  Although you can try creating your trust from scratch or via software, it is best left to a professional. These are complex documents. An experienced estate planning attorney who specializes in trusts will make sure your trust is legal and stays legal.

  After you create the trust, property you want controlled by the trust must be legally transferred “into” it. An unfunded living trust does you no good. You fund it by transferring ownership of property to the trust. After the transfer is made, the grantor or creator of the trust (that’s you) technically no longer owns the property; however, since you are in charge of the trust (you name yourself as trustee of the trust during your lifetime), you still enjoy the property as always.

  Whatever is owned by the trust stays in the trust and doesn’t go through probate when you die. When you create the trust, you decide as to how and when you want the trust property distributed to your beneficiaries per the terms of the trust.

  Name Your Successor Trustee

  Your named successor trustee (another brain you need to name if you execute a trust) takes over management of the trust property upon your death and is obligated to follow the terms of the trust that you wrote.

  Your named successor trustee, like the executor you named in your will, has a fiduciary duty (one above and beyond the norm) to not only uphold the terms of the trust but do what is in the best interest of your named beneficiaries.

  Executors and trustees have very similar duties: The difference is your named trustee only controls the property owned by the trust.

  With a living trust, you the grantor have complete control. You not only enjoy the property in the trust just as you always had, but you can change the terms of the trust, move property in and out of the trust, change the named beneficiaries, or disband the trust.

  See what I mean about a living trust being nothing more than a legal trick? If done right, however, it gives you much more flexibility as to how and when your assets are distributed, while still enjoying protection from probate and stepped-up basis.

  Example 6: Personal Residence and a Living Trust

  Let’s revisit Sean and his three kids. If you recall, Sean added his three kids as joint tenants with the rights of survivorship to his $500,000 townhome. That not only created a bit of a hassle for his kids upon Sean’s death, but cost them significant capital gains tax when they eventually sold it.

  If Sean had instead created a living trust and transferred ownership of the townhome to the trust with his three kids as equal beneficiaries, upon his death the house not only would have avoided probate, but the kids would also receive the benefit of stepped-up basis.

  Upon the sale of the townhome after Sean’s death, instead of each kid owing hefty capital gain taxes, tax is avoided entirely [assuming the selling price and appraised market value of the townhome at the time of Sean’s death was the same ($500,000 - $500,000 = 0)].

  Let’s further assume Sean’s youngest kid was age 21 at the time of his death, and Sean didn’t want her inheriting such a valuable asset at such a young age. Sean could write in the terms of the trust he wants the townhome rented out until his youngest turns age 30.

  The terms of Sean’s trust could instruct the successor trustee to rent out the townhome. The trust, through the terms of the trust, pays Sean’s successor trustee a fee for her trouble. Upon Sean’s youngest reaching age 30, the townhome is sold, the proceeds distributed equally to Sean’s three kids, and the trust is disbanded.

  The number one reason folks create living trusts is to protect real estate from probate. If you’re married, there is no estate planning issue when the first spouse dies: Their community or joint interest with survivorship rights passes without consequence to the surviving spouse. It’s the surviving spouse that now has an estate planning dilemma.

  Just as there is more than one way to bake a cake, there are several different ways you can bequeath assets. It’s perfectly fine to go with a simpler, cheaper alternative now, with plans on perfecting your plan later on when you’re older and grayer.

  Living Trusts and Maintenance Costs

  I mentioned earlier that maintaining property in a living trust can be expensive. How expensive? It depends on your attorney.

  When moving real property in and out of a trust, which is necessary when refinancing or selling, legal documents need to be properly filled out and recorded. Unless you’re 100% positive you know the correct legal procedures, you’ll more than likely enlist the help of your attorney who helped you draw up the trust to help you.

  How much will your attorney charge you for those services? During your working years, assuming you refinanced your personal residence three times and bought three homes (and sold the old ones), that’s twelve separate transfers that need to be made in and out of the trust.

  Folks have reported to me their attorneys only charged a few bucks for these services. Others complained about having to pay much, much more.

  Be sure you know what these fees are before you decide on which attorney you want to draw up your trust. The above described paper shuffling should only take your attorney a few minutes to complete, but what if they charge $400/hour with a one hour minimum?

  Example 7: Using a Will and Then a Trust

  Let’s once again revisit widower Sean and his three kids. Sean may not want to go to the expense and hassle of creating a living trust when he’s young and healthy.

  As you now know, if Sean wanted to refinance his townhome or sell it and buy another, laws require him to transfer ownership of the townhome back to himself from the trust, then re-title ownership back to the trust.

  This could be cumbersome and expensive for Sean, especially if he plans on moving/refinancing multiple times over the years. On the other hand, he may tolerate the expense and inconvenience for the protection the trust affords (or found an attorney that doesn’t charge an arm and a leg for those services).

  Another alternative for Sean would be early on to state in his will he wants his three kids to equally inherit his residence. Remember, everyone needs a will, regardless of circumstances or age, to name your executor and guardian for minor children, so this could be done with little or no additional expense.

  Once Sean grows older and is more settled, a living trust can then be created and ownership of the townhome transferred to it.

  If Sean died unexpectedly (there’s that damn bus again!) before creating the living trust, even though the residence would have to go through probate it still goes to his desired beneficiaries.

  Once he creates the trust and title to the residence is transferred to it, the trust takes precedence over what was previously instructed in his will, even if he neglected to amend it.

  As in the above example, a will can be used as a “placeholder” for assets, with the intention of eventually transferring them to a living trust. That way you’re not subject to your state’s laws of intestate succession, even th
ough your estate will have to cough up more cash to probate your residence if disaster strikes.

  You can transfer just about any type of asset into your living trust. Most assets don’t have a legal title like real estate, which makes the transfer less complicated. Simply identifying assets in the terms of the trust is often all that’s necessary for the “transfer.”

  Assets you definitely don’t want to transfer into your living trust are your retirement accounts. Tax and a possible early withdrawal penalty are likely.

  You could name your living trust as the primary beneficiary, however. Upon your death, funds transfer to the living trust. The terms of the trust would then dictate how those funds are distributed; otherwise, the assets are transferred directly to your named beneficiary with little or no withdrawal restrictions.

  Bling — Next Steps

  - Inventory your assets to determine where the majority of your wealth lies. (Those are the assets you want to protect from probate.)

  - Make a list of all financial accounts and determine which are contracts and covered by beneficiary statements and which are not.

  - Fill out both the primary and secondary designations for each beneficiary statement and make copies to keep with your other estate planning paperwork.

  - Decide which of your financial accounts not covered by beneficiary statements or survivorship rights should be probated or transferred via a POD or TOD in the absence of a trust.

  - Consider protecting your valuable real estate from probate with one of the following will substitutes: living trust, ownership with survivorship rights, or a TOD (if allowed in your state of residence).