1. Joint Tenancy – Avoids Probate:
It is true that an asset titled: “John Smith and Mary Smith, as Joint Tenants, with right of survivorship” will avoid probate at the death of the first joint tenant. However, at the death of the first joint tenant the asset will then be retitled in only the surviving joint tenant’s name. Thereafter, in the event the surviving joint tenant does not create a proper estate plan, typically including a Trust, at his or her subsequent death, assets will be required to got through probate.
2. An Invalid or Outdated Will:
If a Will is not properly executed in accordance with statutory law it is invalid. Therefore, the Decedent will be treated as having died “intestate,” and the estate will be distributed to his or her heirs, as defined by the state legislature. In addition, if the validity of a Will is questioned by family members and other heirs a “Simple Will” may lead to a costly “Will Contest.”
A Will that has not been updated may create serious estate planning problems. That is because it may fail to address the following issues:
a. Recent marriages, divorces, or marital separations.
b. Recent births, deaths, or adoptions of children.
c. Changes in both federal and state tax law.
d. Changing needs of beneficiaries (i.e., age, incapacity etc.)
3. Life Insurance and/or Retirement Plan Beneficiaries:
A life insurance policy owner (i.e. the insured), or IRA participant names a primary beneficiary. However, the insured or IRA participant often fails to name a secondary beneficiary. In the event the primary beneficiary dies and no secondary beneficiary is designated, this will cause the life insurance death benefits or retirement plan proceeds to go through probate. It is the worst of all worlds for IRA or life insurance benefits to go through probate due to the simple fact the insured or IRA participant failed to name a secondary beneficiary.
4. Failure to “Fund” a Revocable Living Trust:
Both married and single clients may establish a Revocable Living Trust with the thought that “I have now avoided probate.” However, for a Trust to avoid probate the Settlor/Trustor/Grantor (i.e., the creator of the Trust), must “fund” the Trust. Another word for “funding” the Trust is, “retitling” assets into the name of the Trust. If a Settlor dies and has not properly funded his or her Trust, there is a strong probability such estate will go through probate.
5. Failure to keep your Trust up-to-date due to Tax Law changes:
Many, married and single clients believe that because the current “Federal Estate Tax Exemption” or “Applicable Exclusion Amount” in 2019, is $11,400,000.00, per individual, they need not worry about their existing Trust. That is because their estate does not exceed $11,400,000.00. However, if clients are married and their Trust was drafted when the Federal Estate Tax Exemption Amount was $675,000.00 in 2000, or before, their current Trust may require the surviving spouse to file unnecessary state and federal Trust tax returns, as well as to establish additional outdated Trusts. It is critical to keep your Trust in compliance with recent tax law changes. Otherwise, you may have created unnecessary complexities for the surviving spouse, as well as for other remainder beneficiaries.
6. Community Property is the same as Joint Tenancy:
Community property and joint tenancy are two (2) entirely different forms of asset titling. If you are married and living in a community property state such as California, you have the opportunity of titling assets as community property. However, as a general rule this does not happen automatically. Community property offers major income tax benefits to married couples which are not available through joint tenancy. If a married couple has all assets titled as community property, establishes a Revocable Living Trust, and then retitles all such community property assets into their Trust, the surviving spouse will receive a major income tax benefit at the death of the first spouse.
The tax benefit is that all community property assets (with the exception of retirement plans) receive a new One Hundred Percent (100%) step-up in income tax cost basis. In other words, the capital gains a married couple would have had to pay if they had sold assets while both spouses were alive disappears. The new appraised value of each community property asset is its new cost basis. The surviving spouse may now liquidate/sell investments at their new appraised “fair market value” and pay zero (0) in income tax.
By comparison, if all assets are titled in joint tenancy at the death of the first spouse while avoiding probate, such assets do will not receive the community property double step-up in coast basis. Only the deceased joint tenant’s One-Half (1/2) interest receives a step-up in income tax cost basis. Finally, assets titled in joint tenancy cannot fund a Trust, and may end up going through probate at the surviving joint tenant’s date of death.