Friday, April 9, 2010
Should I Own Property In Joint Tenancy?
"Joint Tenancy With Right of Survivorship" means that each person has equal access to the property. When one owner dies, that person's share immediately passes to the other owner(s) in equal shares, without going through probate. This is the opposite of owning property as "Tenants in Common" when one of the owners dies, his or her share passes down to their respective descendants. We've all been told that joint tenancy is a simple and inexpensive way to avoid probate, and this is sometimes true. But the tax and legal problems of joint tenancy ownership can be mind-boggling. Below are some of the issues that could arise if property is held in joint tenancy:
1. Owning property jointly doesn't avoid probate completely. When either joint tenant dies, the survivor -- usually a spouse or a child -- immediately becomes the owner of the entire property. But when the survivor dies, the property still must go through probate. Joint tenancy doesn't avoid probate; it simply delays it. If you want to avoid this situation, you should get information about revocable trusts that solve this issue. (While Arizona has "Community Property with Right of Survivorship", this does solve the capital gains issue that joint tenancy property causes, but it still does not avoid the eventual probate when the second spouse dies).
2. Two probates when joint tenants die together. If both of the joint tenants die at the same time, such as in a car accident, there will be two probate administrations, one for the share of each joint tenant in the joint tenancy property as well as any other property they each may own.
3. Unintentional disinheriting. When blended families are involved, with children from previous marriages, here's what could happen: the husband dies and the wife becomes the owner of the property. When the wife dies, the property goes to her children, leaving nothing for the husband's children.
4. Unequal inheritance. For individuals that attempt to use joint tenancy in lieu of a will or trust, thinking they can transfer the assets to their children without probate, the likelihood of unequal inheritance becomes likely. For example, if you name one child as a joint tenant on a bank account and another child as a joint tenant on your home, these may be of same value on the day the joint tenancy is created. Unfortunately, in this circumstance, if the bank account is used for your support, and depleted, one child gets the home and the other child gets the remainder in the bank. This sets up hurt feelings between the children after a parent is gone.
5. Gift taxes. When you place a non-spouse on your property as a joint tenant, you make a gift of property every time that joint tenant takes property out of the account. For example, when a mother re-titles her $500,000 home in joint tenancy with her son, she makes a gift to her son of $250,000. This may not be the most efficient use of her $13,000 annual exclusion. The main point is that the gift is unintentional and not carefully planned.
5. Right to sell or encumber. Joint Tenancy makes it more difficult to sell or mortgage property because it requires the agreement of both parties, which may not be easy to get.
6. Financial problems. If either owner of joint tenancy property fails to pay income taxes, the IRS can place a tax lien on the property. If either owner files for bankruptcy, the trustee may be permitted to sell the property even though the other joint tenant is not otherwise involved in the bankruptcy.
7. Court judgments. If either joint tenant has a judgment entered against them, such as from a car accident or business dealings, the holder of the judgment may be able to execute the judgment against the joint tenancy property. In other words, the liabilities of a child may come after the assets of the parent because of the creation of a joint tenancy.
8. Incapacity. If either joint owner becomes physically or mentally incapacitated and can no longer sign his name, you may have to seek judicial approval before any jointly owned property can be sold or refinanced -- even if the co-owner is the spouse. Owning property jointly is the customary standard, especially when owned by spouses. However, that doesn't mean that type of ownership should be taken for granted. If you have a situation in your life where you need to consider either protecting that asset or designing how it will be distributed upon your death, you should become familiar with all types of property ownership and place your property in the type of ownership that best suits your needs.
In my opinion, holding your assets in trust avoids all these issues and provides a smooth transition from spouse to spouse, or parent to child, without probate or unnecessary complexities.
My Best,
Jim
1. Owning property jointly doesn't avoid probate completely. When either joint tenant dies, the survivor -- usually a spouse or a child -- immediately becomes the owner of the entire property. But when the survivor dies, the property still must go through probate. Joint tenancy doesn't avoid probate; it simply delays it. If you want to avoid this situation, you should get information about revocable trusts that solve this issue. (While Arizona has "Community Property with Right of Survivorship", this does solve the capital gains issue that joint tenancy property causes, but it still does not avoid the eventual probate when the second spouse dies).
2. Two probates when joint tenants die together. If both of the joint tenants die at the same time, such as in a car accident, there will be two probate administrations, one for the share of each joint tenant in the joint tenancy property as well as any other property they each may own.
3. Unintentional disinheriting. When blended families are involved, with children from previous marriages, here's what could happen: the husband dies and the wife becomes the owner of the property. When the wife dies, the property goes to her children, leaving nothing for the husband's children.
4. Unequal inheritance. For individuals that attempt to use joint tenancy in lieu of a will or trust, thinking they can transfer the assets to their children without probate, the likelihood of unequal inheritance becomes likely. For example, if you name one child as a joint tenant on a bank account and another child as a joint tenant on your home, these may be of same value on the day the joint tenancy is created. Unfortunately, in this circumstance, if the bank account is used for your support, and depleted, one child gets the home and the other child gets the remainder in the bank. This sets up hurt feelings between the children after a parent is gone.
5. Gift taxes. When you place a non-spouse on your property as a joint tenant, you make a gift of property every time that joint tenant takes property out of the account. For example, when a mother re-titles her $500,000 home in joint tenancy with her son, she makes a gift to her son of $250,000. This may not be the most efficient use of her $13,000 annual exclusion. The main point is that the gift is unintentional and not carefully planned.
5. Right to sell or encumber. Joint Tenancy makes it more difficult to sell or mortgage property because it requires the agreement of both parties, which may not be easy to get.
6. Financial problems. If either owner of joint tenancy property fails to pay income taxes, the IRS can place a tax lien on the property. If either owner files for bankruptcy, the trustee may be permitted to sell the property even though the other joint tenant is not otherwise involved in the bankruptcy.
7. Court judgments. If either joint tenant has a judgment entered against them, such as from a car accident or business dealings, the holder of the judgment may be able to execute the judgment against the joint tenancy property. In other words, the liabilities of a child may come after the assets of the parent because of the creation of a joint tenancy.
8. Incapacity. If either joint owner becomes physically or mentally incapacitated and can no longer sign his name, you may have to seek judicial approval before any jointly owned property can be sold or refinanced -- even if the co-owner is the spouse. Owning property jointly is the customary standard, especially when owned by spouses. However, that doesn't mean that type of ownership should be taken for granted. If you have a situation in your life where you need to consider either protecting that asset or designing how it will be distributed upon your death, you should become familiar with all types of property ownership and place your property in the type of ownership that best suits your needs.
In my opinion, holding your assets in trust avoids all these issues and provides a smooth transition from spouse to spouse, or parent to child, without probate or unnecessary complexities.
My Best,
Jim
Thursday, February 25, 2010
Estate Executor Liable for Unpaid Debts of Decedent
In a recent court case, US v James Louis Guyton Jr., the executor of the estate was made liable to the IRS for the balance of the income taxes of the decedent for income earned prior to his death. The decedent had sold some property for a substantial gain prior to his death, using a portion of it to pay off mortgages, and put the balance in a joint checking account with his one son. He died shortly thereafter and his other son was named executor of the estate. Upon filing the decedent’s tax return for the year of his death there was a large tax liability of which the executor paid a portion and stated that the balance should be paid by the brother who had received the money in the joint bank account. The IRS said not necessarily. There is no obligation for them to go after the joint tenant for the money, and the executor of the estate is liable for the tax and may have a claim to go after the brother.
What this case means to any of your clients who have been appointed successor trustees or executors in an estate is that they must be sure that all legitimate debts, in particular any income taxes owed by the decedent, are fully paid from the estate funds. The case outline did not mention if the executor had distributed assets from the estate to other parties without paying the tax.
As a general rule, if you have clients who are appointed the executor or successor trustee of an estate, they need to be absolutely sure that all obligations of the estate are paid first before distributing any money to beneficiaries or that they have enough of a cash reserve left in the estate bank account to cover any anticipated liabilities. One of the first things we tell people upon accepting an appointment is that if they distribute money from the estate they do it at their own peril. That is, if any obligations come up later and there are not sufficient assets remaining in the estate, they are personally obligated to the extent of the monies they have distributed. The executor needs to review the decedent’s financial situation and tax returns very carefully. I know such individuals are often eager to wrap things up quickly, but in doing so they may cost themselves substantial dollars if an unforseen liability appears.
Call us if you have clients who are placed in similar positions so we can assist them in properly administering the estate. Despite any agreements among family members, the IRS looks to the executor first.
My Best,
Jim
What this case means to any of your clients who have been appointed successor trustees or executors in an estate is that they must be sure that all legitimate debts, in particular any income taxes owed by the decedent, are fully paid from the estate funds. The case outline did not mention if the executor had distributed assets from the estate to other parties without paying the tax.
As a general rule, if you have clients who are appointed the executor or successor trustee of an estate, they need to be absolutely sure that all obligations of the estate are paid first before distributing any money to beneficiaries or that they have enough of a cash reserve left in the estate bank account to cover any anticipated liabilities. One of the first things we tell people upon accepting an appointment is that if they distribute money from the estate they do it at their own peril. That is, if any obligations come up later and there are not sufficient assets remaining in the estate, they are personally obligated to the extent of the monies they have distributed. The executor needs to review the decedent’s financial situation and tax returns very carefully. I know such individuals are often eager to wrap things up quickly, but in doing so they may cost themselves substantial dollars if an unforseen liability appears.
Call us if you have clients who are placed in similar positions so we can assist them in properly administering the estate. Despite any agreements among family members, the IRS looks to the executor first.
My Best,
Jim
How Much Can an Older Lady Afford (Continued)
This is continued from an piece I did in my Newsletter:
An article in The Arizona Republic by Laurie Roberts for Dec. 2 adds more details about the court, guardian and legal expenses of the poor woman who saw her nest egg vanish into thin air. The attorney for the trustee who oversaw the guardianship collected over $345,000 in fees, the guardian $178,000, and $235,000 was spent on "other supplies" over a 20-month period. In addition, the attorneys for the guardian received another $57,000. As you can see, it didn’t take long for a $1.3 million to disappear. If she had properly planned in advance, many of these expenses could have been avoided. Certainly the high cost of guardians and legal fees could have been modified and reduced to allow more of her money for direct care and supervision.
As a follow up, there was a third article on Dec. 19 entitled, "No Justice for an Elderly Woman as Fortune Vanishes," in which Ms. Roberts wrote, "Marie Long was officially declared indigent this week by Maricopa County Superior Court Commissioner Lindsay Ellis." The article states that Ellis ought to know. The entire time she has been presiding over this case of this 88-year old woman who was worth $1.3 just four years ago. Ellis is a probate judge who stood by and did nothing as hundreds of thousands of dollars were drained away in a great part by guardian fees and lawyers. While there were several people who begged the court to do something, it took Ellis a year to consider one of the requests. When she finally got around to holding the hearing, the money was gone.
This saga is one of the main reasons we strongly urge clients to adequately prepare for the possibility that they may become incompetent no matter how wealthy they may be. While this elderly woman was not super-rich, she certainly had a sufficient amount of assets that should have provided for her adequately for the remainder of her life.
This case may be unusual, but it is not an impossible one. The court system is not designed for speed and efficiency. We have tell clients that there is no such thing as quick justice in the legal system. The case of Marie Long certainly illustrates this principle. Not only has the court deigned that she is indigent but that her newly appointed guardian would be removed if she were to pursue any legal action against any prior parties. Thus, in effect, the court precludes any action on anyone’s part to try to recover any monies for Marie.
What does this mean to you and your clients? Simply this: Whether they have $500,000 or $5 million, they need to have a plan that, should they become incapacitated through an accident, illness, or just old age, they have a mechanism in place that will allow their property to be properly administered for their benefit without having court interference. By spending a few dollars now they can establish a detailed program that spells out what they want done, who should act, and what they should do so that court interference with the management and control of their property is avoided or kept to a minimum. In doing so they need to be careful to select persons or entities who will follow their wishes at a reasonable cost to them.
Sadly, Marie Long’s money should have kept her comfortable for 15 years at a Mariott-level assisted living facility.
My Best,
Jim
An article in The Arizona Republic by Laurie Roberts for Dec. 2 adds more details about the court, guardian and legal expenses of the poor woman who saw her nest egg vanish into thin air. The attorney for the trustee who oversaw the guardianship collected over $345,000 in fees, the guardian $178,000, and $235,000 was spent on "other supplies" over a 20-month period. In addition, the attorneys for the guardian received another $57,000. As you can see, it didn’t take long for a $1.3 million to disappear. If she had properly planned in advance, many of these expenses could have been avoided. Certainly the high cost of guardians and legal fees could have been modified and reduced to allow more of her money for direct care and supervision.
As a follow up, there was a third article on Dec. 19 entitled, "No Justice for an Elderly Woman as Fortune Vanishes," in which Ms. Roberts wrote, "Marie Long was officially declared indigent this week by Maricopa County Superior Court Commissioner Lindsay Ellis." The article states that Ellis ought to know. The entire time she has been presiding over this case of this 88-year old woman who was worth $1.3 just four years ago. Ellis is a probate judge who stood by and did nothing as hundreds of thousands of dollars were drained away in a great part by guardian fees and lawyers. While there were several people who begged the court to do something, it took Ellis a year to consider one of the requests. When she finally got around to holding the hearing, the money was gone.
This saga is one of the main reasons we strongly urge clients to adequately prepare for the possibility that they may become incompetent no matter how wealthy they may be. While this elderly woman was not super-rich, she certainly had a sufficient amount of assets that should have provided for her adequately for the remainder of her life.
This case may be unusual, but it is not an impossible one. The court system is not designed for speed and efficiency. We have tell clients that there is no such thing as quick justice in the legal system. The case of Marie Long certainly illustrates this principle. Not only has the court deigned that she is indigent but that her newly appointed guardian would be removed if she were to pursue any legal action against any prior parties. Thus, in effect, the court precludes any action on anyone’s part to try to recover any monies for Marie.
What does this mean to you and your clients? Simply this: Whether they have $500,000 or $5 million, they need to have a plan that, should they become incapacitated through an accident, illness, or just old age, they have a mechanism in place that will allow their property to be properly administered for their benefit without having court interference. By spending a few dollars now they can establish a detailed program that spells out what they want done, who should act, and what they should do so that court interference with the management and control of their property is avoided or kept to a minimum. In doing so they need to be careful to select persons or entities who will follow their wishes at a reasonable cost to them.
Sadly, Marie Long’s money should have kept her comfortable for 15 years at a Mariott-level assisted living facility.
My Best,
Jim
Wednesday, November 25, 2009
Celebrity Mistakes on Forbes.com
This was really interesting. I just hit some of the highlights but you will find the full pictorial article included in the link at the bottom.
Marlon Brando
Angela Borlaza, actor girlfriend, claimed Brando gave her the house she lived in. She settled with the executors of his estate for $125,000. She also claimed Brando promised her continued employment with a company he owned, and settled that claim out of court.
Leona Helmsley
When she died in 2007, Helmsley will left most of her $5 billion estate to charity, created a $12 million trust for her dog, Trouble, and completely cut out two of her four grandchildren. The two grandkids sued her estate, claiming she wasn't mentally fit to create her will and trust. The case settled, with Trouble getting $2 million, and the two grandkids sharing $6 million.
Brooke Astor (you know this story if you have been following my blog).
In October 2009, socialite Brooke Astor's son Anthony Marshall was convicted of fraud and grand larceny relating to his handling of his late mother's estate. The 14 counts of which a New York jury found Marshall guilty included misusing his power of attorney over her financial affairs by giving himself a retroactive $1 million raise for managing her finances.
Ted Williams
In his will, baseball's Ted Williams said he wished to be cremated. But his two children from a second marriage produced a grease-stained note saying he wished to be put in biostasis after his death, and they froze his body after his death in 2002. His eldest daughter fought to have his body unfrozen and cremated, but gave up the fight when she ran out of money.
Heath Ledger
When actor Heath Ledger died at age 28 in 2008, he had a will, but it was written three years before he died, prior to his relationship with Michelle Williams and the birth of their daughter, Matilda Rose. The will left everything to his parents and sister. When Ledger's uncles raised fears that his father wouldn't properly care for Matilda Rose, Ledger's father said he would.
Princess Di
At her death in 1997, Princess Diana left a detailed will, naming her sister and mother as executors. She also wrote a separate "letter of wishes" asking her executors, at their discretion, to divide her belongings among her sons and her 17 godchildren. But instead of getting stuff worth an estimated 100,000 pounds, each godchild got only a small personal item.
Chief Justice of the Supreme Court Warren Burger
Mr. Burger died in 1995 with a $1.8 million estate and a will he typed up himself. His family paid $450,000 in estate taxes, something that could have been avoided. His executors had to pay to go to court to get approval to complete administrative acts, such as selling real estate, that typically a well-drafted will would have allowed without court approval.
Jimi Hendrix
Mr. Hendrix died at age 27 in 1970 without a will. Under state law, his dad, Al, got everything, leaving his close brother Leon with nothing. Al built Hendrix's musical legacy into an $80 million venture, but in his own will cut out Leon and his family, in favor of his adopted daughter through a later marriage.
Doris Duke
Tobacco heiress Doris Duke, who died in 1993 with a fortune estimated at $1.3 billion, named her butler as executor and as trustee for a huge charitable foundation. After the butler's lifestyle and spending habits were called into question, he was removed from his duties by a probate judge, then reinstated by New York's highest court. A settlement agreement created a board of trustees to manage the foundation.
Full article can be found at:
http://www.forbes.com/2009/11/24/princess-di-heath-ledger-brando-personal-finance-investment-guide-2-09-celebrity-estate-mistakes_slide_2.html
Marlon Brando
Angela Borlaza, actor girlfriend, claimed Brando gave her the house she lived in. She settled with the executors of his estate for $125,000. She also claimed Brando promised her continued employment with a company he owned, and settled that claim out of court.
Leona Helmsley
When she died in 2007, Helmsley will left most of her $5 billion estate to charity, created a $12 million trust for her dog, Trouble, and completely cut out two of her four grandchildren. The two grandkids sued her estate, claiming she wasn't mentally fit to create her will and trust. The case settled, with Trouble getting $2 million, and the two grandkids sharing $6 million.
Brooke Astor (you know this story if you have been following my blog).
In October 2009, socialite Brooke Astor's son Anthony Marshall was convicted of fraud and grand larceny relating to his handling of his late mother's estate. The 14 counts of which a New York jury found Marshall guilty included misusing his power of attorney over her financial affairs by giving himself a retroactive $1 million raise for managing her finances.
Ted Williams
In his will, baseball's Ted Williams said he wished to be cremated. But his two children from a second marriage produced a grease-stained note saying he wished to be put in biostasis after his death, and they froze his body after his death in 2002. His eldest daughter fought to have his body unfrozen and cremated, but gave up the fight when she ran out of money.
Heath Ledger
When actor Heath Ledger died at age 28 in 2008, he had a will, but it was written three years before he died, prior to his relationship with Michelle Williams and the birth of their daughter, Matilda Rose. The will left everything to his parents and sister. When Ledger's uncles raised fears that his father wouldn't properly care for Matilda Rose, Ledger's father said he would.
Princess Di
At her death in 1997, Princess Diana left a detailed will, naming her sister and mother as executors. She also wrote a separate "letter of wishes" asking her executors, at their discretion, to divide her belongings among her sons and her 17 godchildren. But instead of getting stuff worth an estimated 100,000 pounds, each godchild got only a small personal item.
Chief Justice of the Supreme Court Warren Burger
Mr. Burger died in 1995 with a $1.8 million estate and a will he typed up himself. His family paid $450,000 in estate taxes, something that could have been avoided. His executors had to pay to go to court to get approval to complete administrative acts, such as selling real estate, that typically a well-drafted will would have allowed without court approval.
Jimi Hendrix
Mr. Hendrix died at age 27 in 1970 without a will. Under state law, his dad, Al, got everything, leaving his close brother Leon with nothing. Al built Hendrix's musical legacy into an $80 million venture, but in his own will cut out Leon and his family, in favor of his adopted daughter through a later marriage.
Doris Duke
Tobacco heiress Doris Duke, who died in 1993 with a fortune estimated at $1.3 billion, named her butler as executor and as trustee for a huge charitable foundation. After the butler's lifestyle and spending habits were called into question, he was removed from his duties by a probate judge, then reinstated by New York's highest court. A settlement agreement created a board of trustees to manage the foundation.
Full article can be found at:
http://www.forbes.com/2009/11/24/princess-di-heath-ledger-brando-personal-finance-investment-guide-2-09-celebrity-estate-mistakes_slide_2.html
Thursday, November 19, 2009
Roth Conversions
All of a sudden my mailbag is full of articles about Roth Conversions. While this may be a good idea, be careful, it certainly isn't for every client. Let me start with some background.
The benefit of Roth is you can withdraw earnings tax-free AND you do not have to take minimum withdrawals upon reaching 70 1/2. Traditional IRAs did not have this benefit, and to be frank, I have been assuming all along they were going to take this gift horse away.
Beginning next year higher-net-worth individuals who earn $100,000 or more in a year will be eligible to convert their traditional IRA to a Roth IRA. Previously, it was only those under this limit AND married couples filing jointly. No more in 2010.
Now, higher net earning individuals and business owners that do not want to withdraw the money and would like to be able to pass it along to their children or grandchildren income tax-free will get their wish. Everyone on board? Not so fast.
A Roth conversion is expensive. There's a big up-front cost. Converting $20,000 some taxpayers could owe $5,000 to $7,000 in taxes for the 2010 return, depending on their income tax bracket. You could convert all the money in your IRAs or part of it, depending on your tax situation.
A high net worth person who converts $100,000 from a regular IRA to a Roth IRA could owe $35,000 in taxes based on the highest tax bracket for 2010. Plus, if that person is younger than age 59 1/2 , they're likely looking at a 10% penalty of they take the money out of a regular IRA specifically to pay the tax. Next year, only, you can pay the tax over two years BUT based on your tax rates for each year. If Congress takes no action, current federal income tax rates could jump to 39.6%, up from 35% in 2011.
Therefore, to decide whether it is worth the conversation, you need someone that can run the numbers based upon your reasonable expectations. You are looking to see if it is cost efficient to pay the tax now to save on taxes later. If you may need the money within 15 years and you expect your income tax rate to be lower in retirement, conversion may not be such a great idea.
My best,
Jim
The benefit of Roth is you can withdraw earnings tax-free AND you do not have to take minimum withdrawals upon reaching 70 1/2. Traditional IRAs did not have this benefit, and to be frank, I have been assuming all along they were going to take this gift horse away.
Beginning next year higher-net-worth individuals who earn $100,000 or more in a year will be eligible to convert their traditional IRA to a Roth IRA. Previously, it was only those under this limit AND married couples filing jointly. No more in 2010.
Now, higher net earning individuals and business owners that do not want to withdraw the money and would like to be able to pass it along to their children or grandchildren income tax-free will get their wish. Everyone on board? Not so fast.
A Roth conversion is expensive. There's a big up-front cost. Converting $20,000 some taxpayers could owe $5,000 to $7,000 in taxes for the 2010 return, depending on their income tax bracket. You could convert all the money in your IRAs or part of it, depending on your tax situation.
A high net worth person who converts $100,000 from a regular IRA to a Roth IRA could owe $35,000 in taxes based on the highest tax bracket for 2010. Plus, if that person is younger than age 59 1/2 , they're likely looking at a 10% penalty of they take the money out of a regular IRA specifically to pay the tax. Next year, only, you can pay the tax over two years BUT based on your tax rates for each year. If Congress takes no action, current federal income tax rates could jump to 39.6%, up from 35% in 2011.
Therefore, to decide whether it is worth the conversation, you need someone that can run the numbers based upon your reasonable expectations. You are looking to see if it is cost efficient to pay the tax now to save on taxes later. If you may need the money within 15 years and you expect your income tax rate to be lower in retirement, conversion may not be such a great idea.
My best,
Jim
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