Estate Planning Hazards ⋆ Carol L. Grant, P.A.

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Estate Planning Hazards

Figuratively speaking, life is chock full of road hazards. If we know where they are, then we can avoid them. It is the unknown hazards that are the problem. Just like when you’re traveling on an unfamiliar road, it is best to learn from the experiences of those who have been down that road before. For example, if that automobile in front of you swerves to miss a crater in the road, then you may want to do the same. So it is with your estate plan. We can learn a lot from the failures and near misses of others. In that spirit, consider two common sources of dangerous estate planning hazards: beneficiary designations and joint tenancy ownership.

Beneficiary Designations

Depending on the state in which you live, virtually any titled asset may pass directly upon death simply by adding a beneficiary designation. Likely, many of your assets such as life insurance, annuities, and retirement funds will pass by a beneficiary designation. In addition, the non-probate transfer laws of many states provide for “pay on death” or “transfer on death” designations that work in much the same manner. Consequently, you may even designate beneficiaries for bank accounts, CDs, stocks, and other assets. Some states provide for the transfer of real estate through the use of a special transfer on the death deed.

Arranging for the transfer of your assets at death by beneficiary designations is attractive for several reasons, including its simplicity and the fact that little to no attorney work is required. While all of this looks smooth on the surface, beneficiary designations can become serious hazards when it comes to your estate planning objectives.

Beneficiary Designation Hazards

For example, did you know that any assets designated to pass directly to your beneficiaries are not subject to the terms of your estate planning legal documents like your will or trust? Consequently, you may be disinheriting some of your heirs in whole or in part. In addition, any asset protection or special needs planning you created in your will or trust may not take effect as intended. Keeping your beneficiary designations current is vital to the success of your estate plan. You cannot simply take a “set it and forget it” approach.

Joint Tenancy Ownership

If you own any assets jointly with others, then you are in good company. Joint tenancy is one of the most common forms of asset ownership. In fact, if you own a bank account, brokerage account, or perhaps real estate with one or more persons, then chances are quite good that you and they may be joint tenants. The full legal expression for this form of ownership is joint tenants with rights of survivorship (JTWROS).

Although JTWROS is most often found on the title to assets owned by married couples in common law states, residents of community property states also should understand JTWROS given the mobile nature of our society. In some states, a special form of joint ownership called tenancy by the entirety is available to assets held solely between spouses. There are special “asset protection” aspects to tenancy by the entirety ownership that can be very beneficial.

When one or more persons hold title to an asset as joint tenants, each of them owns the asset. In most cases, if one joint tenant becomes incapacitated, then the other joint tenant may continue to fully control their JTWROS assets without interference because of their concurrent ownership rights. When one joint tenant dies, the remaining joint tenants continue to own the asset without the need for probate. Ultimately, the sole surviving joint tenant owns the entire asset. This “right of survivorship” is one of the attractive legal features of JTWROS.

Not surprisingly, many JTWROS relationships are between family members. It just seems like the natural thing to do and, especially between spouses in a long-term marriage, it reflects the financial partnership of their commitment.

For this reason many widows, widowers, and other single adults may add trusted family members or friends as JTWROS to their assets. Nevertheless, as with most things in life, there are hidden hazards when it comes to this form of asset ownership.

Joint Ownership Hazards

While it is true that JTWROS may avoid probate at death, this is true only if there is at least one living joint tenant who is not also incapacitated. To ensure this, however, most people add non-spouses as joint tenants.

Whether it is children, siblings, or friends, resist the temptation! Once you add a joint tenant to a given asset, he or she also owns the given asset just as you do. What you may have intended merely as a convenience has instead subjected the control, use, and enjoyment of such asset to the potential liabilities of each joint tenant. These liabilities may come in many forms through your joint tenant, to include divorces, lawsuits, or creditors.

To make matters worse, your plans for the eventual distribution of your assets may be lost through JTWROS ownership. For example, your will or trust may not control assets held in JTWROS. Quite often assets passing to a surviving spouse later end up in JTWROS with a new spouse. That new spouse (and stepchildren) ultimately may receive assets from the previous marriage instead of the children for whom they were originally intended. Disinheritance risks must be carefully considered in every blended family situation.

Closing Thoughts

As with any decisions affecting beneficiary designations and asset titling, be sure to consult with an experienced estate planning attorney. Otherwise, you may fall victim to some extremely unpleasant legal hazards.