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Optimize Estate Planning and Tax Savings By Properly Titling Joint Accounts

Ensure Your Joint Accounts are Titled in Accordance with your Estate Plan, and Optimize Tax Savings

By Alicia Reissman
November 10, 2009

One of the best things you can do for your family is ensure your estate plans stay up to date. This means that your wishes will be carried out, and settling your affairs much easier for your loved ones after you pass. An important factor in keeping your plans current that people often don’t realize, however, is the constant change in the law as it applies to those plans.

Changes in the law that affect estate planning happen more frequently than you may realize. Although they are typically small, they can have a huge impact on your estate, how your assets are divided, and the taxes your family will pay.

Title Your Joint Accounts to Match Your Wishes

An excellent example of a recent change in the law as it applies to estate planning pertains to your joint financial accounts.

Historically joint accounts held by married couples, titled just as joint tenants, without specifying rights of survivorship, were deemed to be owned jointly without rights of survivorship unless otherwise stated. As such, the assets would not automatically go to the surviving owner of the account. The law now states that if you do not make an election to title the account held as tenants-in-common (which means you each own separate shares of the same property) it will be presumed to be with rights of survivorship, and so the assets become property of your co-owner upon your death.

The Texas Supreme Court case that caused the law to change involved a couple in their second marriage, each with children of their own. The couple amassed significant assets during their marriage which were titled as joint tenants. The brokerage account agreement documents did not specify how the account was to be disposed of after their deaths. Therefore, it was not known if the account was to be held as joint tenants with rights of survivorship or as tenants-in-common without rights of survivorship.

The wife died a few months prior to her husband. Her son, who was her Executor, claimed one-half of the account as her community property interest. The husband’s son, who was his Executor, did not agree and contended that the account was in fact owned jointly but with rights of survivorship. Ultimately, the court agreed with the husband’s son which meant that the wife’s children did not share in these previously jointly owned accounts. In the end, the husband’s estate received the $10,000,000 in investment assets and the wife’s estate received none of the assets in question.

Use Tax-efficient Strategies

Properly titling your accounts can also significantly affect the estate taxes that may be due by your estate. For example, let’s say a married couple has an estate valued at $7,000,000. One of their accounts, valued at $2,000,000, is titled as joint tenants and although not specified, the account is deemed to be with rights of survivorship. If one spouse dies in 2009 while the estate tax exemption amount is $3,500,000, then the deceased spouse’s estate would be valued at $2,500,000 and the surviving spouse’s assets would be valued at $4,500,000. No estate taxes would be due at the first death if the maximum marital deduction is in place. If the surviving spouse dies in 2011 when the estate exemption amount reverts to $1,000,000, there will be a taxable estate of $4,500,000 and the estate tax will be approximately $1,750,000.

If, however, the same couple titles their joint account as tenants-in-common and has a will that takes advantage of the allowable tax deductions, the first estate would be valued at $3,500,000 with no tax due. The second estate would be valued at $3,500,000 and the taxable estate would be $3,500,000. This would result in an estate tax of approximately $1,200,000. While this amount is still a significant tax bill, the proper titling of assets and tax-effective estate planning would provide a savings of approximately $550,000.

Assets Held in Trust

A properly drafted Revocable Living Trust can eliminate the joint property issues. since the terms of the trust would dictate how the assets are to be divided. Your trust can only allocate the assets held in the name of the trust. If you have a trust in place, be sure to title all of your assets in the name of the trust regardless of where those assets are held. The institution holding your assets can assist you by providing the paperwork that you need to make these changes.

Another benefit of the Revocable Living Trust is the simplicity of reporting at tax time. You will continue to use your Social Security number for your accounts owned by your Revocable Living Trust with the income reportable on your personal 1040.

Keeping it all Straight

It is important to do your homework. Gather your asset information and check to see that your safe deposit boxes, stock certificates, brokerage accounts, bank accounts, and any other financial accounts are properly titled. Once you have the information, talk with your advisor and ask him or her to help you ensure your testamentary wishes are carried out.

Your advisor can discuss with you the implications of the decisions you have made in titling your assets and together you can determine if your choices achieve your desired result. You and your advisor are a team. It is your job to keep your advisor current about your family and any change to your personal economic situation. It is your advisor’s job to keep you up to date regarding changing laws that may affect your financial situation.

A detailed, up-to-date estate plan becomes a priceless tool in the event of your passing as your plan can protect your family and assets when you are no longer able to do so yourself. A knowledgeable, trusted fiduciary will help you with this and provide sound peace of mind.