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The Perils of Joint Property

The Perils of Joint Property

People often set up bank accounts or real estate so that they own it jointly with a spouse or other family member. The appeal of joint tenancy is that when one owner dies, the other will automatically inherit the property without it having to go through probate. Joint property is all perceived to be easy to setup since it can be done at the bank when opening an account or title company when buying real estate.

That’s all well and good, but joint ownership can also cause unintended consequences and complications. And it’s worth considering some of these, before deciding that joint ownership is the best way to pass on assets to your heirs.

So let’s explore some of the common problems that can arise.

The other owner’s debts become your problem.

Any debt or obligation incurred by the other owner could affect you. If the joint owner files bankruptcy, has a tax lien, or has a judgment against them, it could cause you to end up with a new co-owner – your old co-owner’s creditors! For example, if you add your adult child to the deed on your home, and he has debt you don’t know about, your property could be seized to collect that debt. Although “your” equity of the property won’t necessarily be taken, that’s little relief when the house you live in is put up on the auction block!

Your property could end up belonging to someone you don’t intend.

Some of the most difficult situations come from blended families. If you own your property jointly with your spouse and you die, your spouse gets the property. On the surface, that may seem like what you intended, but what if your surviving spouse remarries? Your home could become shared between your spouse and her second spouse. And this gets especially complicated if there are children involved: Your property could conceivably go to children of the second marriage, rather than to your own.

You could accidentally disinherit family members.

If you designate someone as a joint owner and you die, you can’t control what she does with your property after your death. Perhaps you and an adult child co-owned a business. You may state in your will that the business should be equally shared with your spouse or divided between all of your kids; however, ownership goes to the survivor – regardless of what you put in your will.

You could have difficulty selling or refinancing your home.

All joint owners must sign off on a property sale. Depending on whether the other joint owners agree, you could end up at a standstill from the sales perspective. That is unless you’re willing to take the joint owner to court to force a sale of the property. (No one wants to sue their family members, not to mention the cost of the lawsuit.)

And what if your co-owner somehow becomes incapacitated, through accident or illness? In that case, you may have to petition a court to appoint a guardian or conservator to represent the co-owner’s interest in the sale. While you and your co-owner always worked together, an appointed guardian may see his responsibility as protecting the other owner’s interest–which might mean going against you.

You might trigger unnecessary capital gains taxes.

When you sell a home for more than you paid for it, you usually pay capital gains taxes–based on the increase in value. Therefore, if you make an adult child a co-owner of your property, and you sell the property, you’re both responsible for the taxes. Your adult child may not be able to afford a tax bill based on decades of appreciation.

On the other hand, heirs only pay capital gains taxes based on the increase in value from when they inherited the asset, not from the day you first acquired it. So often, while people worry about estate taxes, in this case–inheriting a property (rather than jointly owning it) could save your heirs a fortune in income tax. And with today’s generous $5.49 million estate tax exemption, most of us don’t have to worry about the estate tax (but the income tax and capital gains tax hits almost everyone).

You could cause your unmarried partner to have to pay a gift tax.

If you buy property and place it in joint tenancy with an unmarried partner, the IRS will consider that to be a taxable gift to your partner. This can create needless paperwork and taxes.

So what can you do? These decisions are too important and complex to be left to chance.  Contact me, a Family Business Lawyer like myself who specializes in estate planning.  I will help you decide the best way to manage your property to meet your needs and goals.

I can assist you in planning to reduce estate taxes, avoid potential legal pitfalls, and set up a trust to protect your loved ones. I understand not only the legal issues but the complex layers of relationships involved in estate planning. I’ll listen to your concerns and help you develop a plan that gives you peace of mind while achieving all of your goals you have for your family. Contact me and mention this blog article and I can share with you how to obtain a Life & Legacy Planning Session valued at $750 free of charge.

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“I Love You” Wills don’t really say “I Love You”

“I Love You” Wills don’t really say “I Love You”

Here, I’m going to discuss the drawbacks of “I love you” wills and introduce you to the estate planning move that’s actually going to ensure you do well by your loved ones: a lifetime beneficiary trust.

Rise above the misconceptions

No aspect of estate planning brings out as much emotional decision-making as the division of assets. Many people think, “I love you,” so I’ll leave you everything. In order to understand why “I love you” wills are, contrary to their name, not the most caring of estate planning gestures, it’s important to understand the risks of “I love you” wills.

Simply, an “I love you” will is a common name for a will in which the Grantor leaves all of his or her assets outright to his or her surviving spouse.  Many people consider or even use this approach because they think that leaving assets in trust shows they don’t trust their spouse. They may also think that a lack of federal estate taxes protects their assets from getting into the wrong hands. Sadly, many people also think that a will can be used to avoid probate. Unfortunately, none of these things are true.

Understand why “I love you” wills aren’t effective 

Let’s assume for a moment that you want to ensure your spouse gets access to your wealth upon your death.  If all you have completed is a simple “I Love You” will, your spouse (or whomever you designated as your Personal Representative) will have to open a court proceeding, called, Probate, in order to validate your will and transfer your assets.  Depending on how your will was written, your Personal Representative may have to post bond.  Obtaining a Bond requires credit worthiness so if your Personal Representative has a credit problem, the Court may not allow that person to act and will appoint a Professional Fiduciary to act as your Personal Representative if a successor was not named.  In such case, that Personal Representative may not act according to what you had ultimately wanted if it wasn’t spelled out.

Once your spouse receives the assets, which could take years in the Probate Court, the assets are distributed outright.  An outright distribution of assets has many disadvantages, which are listed below.  With your spouse holding all of the assets outright, his/her estate plan will eventually control the distribution of whatever assets are left at her death – assuming proper estate planning was done, otherwise, an additional probate would be opened at his/her death.  If estate planning was completed, s/he has the right to alter his/her plan at any time and any verbal agreements that you two may have had are not enforceable and your wealth may end up in the hands of someone else, rather than your children or other beneficiaries.

Disadvantages of outright distributions include:

  • You could inadvertently disinherit your children. If you use an “I love you” will, your assets are now in your spouse’s hands for him/her to leave however s/he wants. For example, your spouse could leave the assets to his/her own kids, a charity, a lover, or a new spouse.  Likewise, assets left outright to children could be lost in a divorce.
  • Basic planning with outright inheritance sets your heirs up for asset protection issues. Once your assets are owned outright by your beneficiaries through a direct inheritance, those assets can be seized by creditors, divorcing spouses, or lost in bankruptcy. Even if your estate is below the exemption for the death tax, predatory creditors and lawsuits could still spell trouble.
  • These wills still have to go through probate. Surviving spouses do not receive an exemption from probate. Even a simple will still has to go through the process, which you may not be anticipating — especially if you had hoped to keep the details of the will private. If you end up in Probate, the matter becomes public record.  Trusts, however, don’t need to go through probate and all of your assets will pass according to the Trust as long as those assets are titled to your Trust.
  • An “I love you” will does not protect against guardianship or conservatorship court involvement for you or for your beneficiaries. For example, if you leave all of your assets to your spouse and s/he develops dementia, the entire estate (existing assets plus the inheritance s/he received from you) could be under the control of a guardianship or conservatorship court.
  • Basic plans pile more assets into survivors’ estates. Although portability between spouses can help, it still doesn’t prove useful with the generation-skipping transfer tax (GSTT). Portability isn’t available for non-spouse beneficiaries. While at this point in time, having a taxable estate affect a very narrow group of people with very high net worth; however, we don’t know yet what will happen with tax policy under the new Trump presidency. In a changing tax policy landscape, keeping yourself as informed as possible is an important tactic for ongoing success.

Explore lifetime beneficiary directed trusts

Comprehensive, trust-based estate planning with lifetime beneficiary trusts is a better option than outright inheritance for surviving spouses, children, grandchildren, or other beneficiaries. If you leave your assets in lifetime beneficiary trusts, you retain control over where assets end up in the long run. Plus, your beneficiaries obtain robust asset protection features that can keep wealth safe from courts, creditors, and divorcing spouses. Your family’s private information can stay out of public record. You can also take advantage of more sophisticated tax planning than you can with a basic will or trust with outright distributions.

With proper planning now, you can focus on enjoying your life without worry about what could happen in the future.  Now that’s something to love and truly expresses “I love you” to your beneficiaries.  Feel free to contact me and I can share some stories about people who neglected to plan and you can let me know if that is something that you want your family to experience.  I look forward to working for your best interests now as well as down the road.

 

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How You Can Build an Estate Plan that Includes Asset Protection

How You Can Build an Estate Plan that Includes Asset Protection

Yes, estate planning has to do with the way a person’s assets will be distributed upon their death; however, that’s only the tip of the iceberg. From smart incapacity planning to diligent probate avoidance, there is a lot that goes into crafting a comprehensive estate plan. One important factor to consider is asset protection.

Asset protection helps protect assets in a legal manner without engaging in the illegal acts of concealment, contempt, fraudulent transfer, tax evasion or bankruptcy fraud. One of the most important things to understand about asset protection is that not much good can come from trying to protect your assets reactively when surprised by situations like bankruptcy or divorce – at that point, it is too late. The only way to take full advantage of estate planning in regards to asset protection is to prepare proactively long before these things ever come to pass.

There are two main types of asset protection:

Asset protection for yourself:

This is the kind that has to be done long in advance of any proceedings that might threaten your assets, such as bankruptcy, divorce, or judgment. As there are many highly-detailed rules and regulations surrounding this type of asset protection, it’s important to seek advice from your estate planning attorney.

Asset protection for your heirs:

This type of asset protection involves setting up discretionary lifetime trusts rather than outright inheritance, staggered distributions, mandatory income trusts, or other less protective forms of inheritance. There are varying grades of protection offered by different strategies. For example, a trust that has an independent distribution trustee who is the only person empowered to make discretionary distributions offers much better protection than a trust that allows for “ascertainable standards” distributions. While all of this may sound complex, I am here to help you best protect your heirs and their inheritance.

This complex area of estate planning is full of potential misconceptions, so it’s crucial to obtain qualified advice and not solely rely on common knowledge about what’s possible and what isn’t. As a general outline, let’s take a look at three critical junctures when asset protection can help, along with the estate planning strategies we can build together that can set you up for success.

Bankruptcy

It’s entirely possible that you’ll never need asset protection, but it’s much better to be ready for whatever life throws your way. You’ve worked hard to get where you are in life, and just a little strategic planning will help you hold onto what you have so you can live well and eventually pass your estate’s assets on to future beneficiaries. If you experience an unexpected illness or even a large-scale economic recession, you could result in bankruptcy.

Bankruptcy asset protection strategy: Asset protection trusts

Asset protection trusts hold on to more than just liquid cash. You can fund this type of trust with real estate, investments, personal belongings, and more. Due to the nature of trusts, the person controlling those assets will be a trustee of your choosing. Now that the assets within the trust aren’t technically in your possession, they can stay out of creditors’ reach — so long as the trust is irrevocable, properly funded, and operated in accordance with all the asset protection law’s requirements. In fact, asset protections trusts must be formed and funded well in advance of any potential bankruptcy and have numerous initial and ongoing requirements. They are not for everyone, but can be a great fit for the right type of person.

 

Divorce

One of the last things you want to have happen to the nest egg you’ve saved is for your children to lose it in a divorce. In order to make sure your beneficiaries get the parts of your estate that you want to pass onto them — regardless of how their marriage develops — is a discretionary trust.

 Divorce asset protection strategy: Discretionary trusts

When you create a trust, the property it holds doesn’t officially belong to the beneficiary, making trusts a great way to protect assets from a divorce. Discretionary trusts allow for distribution to the beneficiary but do not mandate any distributions. As a result, they can provide access to assets but reduce (or even eliminate) the risk that your child’s inheritance could be seized by a divorcing spouse. There are a number of ways to designate your trustee and beneficiaries, who may be the same person, and, like with many legal issues, there are some other decisions that need to be made. Discretionary trusts, rather than outright distributions, are one of the best ways you can provide robust asset protection for your children.

Family LLCs or partnerships are another way to keep your assets safe in divorce proceedings. Although discretionary trusts are advisable for people across a wide spectrum of financial means, family LLCs or partnership are typically only a good fit for very well-off people.

 

Judgment

When an upset customer or employee sues a company, the business owner’s personal assets can be threatened by the lawsuit. Even for non-business owners, injury from something as small as a stranger tripping on the sidewalk outside your house can end up draining the wealth you’ve worked so hard for. Although insurance is often the first line of defense, it is often worth exploring other strategies to comprehensively protect against this risk.

Judgment asset protection strategy: Incorporation

Operating your small business as a limited liability company (commonly referred to as an LLC) can help protect your personal assets from business-related lawsuits. As mentioned above, malpractice and other types of liability insurance can also protect you from damaging suits. Risk management using insurance and business entities is a complex discipline, even for small businesses, so don’t only rely on what you’ve heard online or “common sense.” You owe it to your family to work with a group of qualified professionals, including your estate planning attorney and an insurance advisor, to develop a comprehensive asset protection strategy for your business.

 These are just a few ways we can optimize your estate plan in order to keep your assets protected, but every plan should be tailored to an individual’s exact circumstances. Give me a call at 858-432-3923 today to discuss your estate plan’s asset protection strategies.

 

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