Garland Law Offices, P.A.

What Do I Need to Know About Owning Property with Someone Other than My Spouse?

“It's very common for spouses to title property they own together as ‘joint with right of survivorship.’ When one passes, the other owns the property outright. It’s simple, easy and automatic. However, it can get messy when the other joint owner isn’t your spouse.”

Have you ever considered owning property jointly with a family member, friend, or a business associate? Inside Indiana Business’ recent article, “Risky: Property Owned with a Non-Spouse,” says that you should think about the negatives, such as loss of control, unknown creditor issues and tax consequences.

Loss of Control. When you choose to co-own an asset with another person, you can enter into a legal ownership agreement known as “joint tenants with rights of survivorship” or “JTWROS.” When one of the owners dies, the surviving owner automatically becomes sole owner of the property. However, you give up some control of ownership, when you own property in this way. For example, you can’t direct your portion to go to a spouse or a child after your death in your will or other estate planning documents. OK, you can, but your co-owner’s ownership title takes precedence over your estate documents. As a result, she will become the sole owner. You can also lose some control over the property, if the non-spouse co-owner transfers her interest in the property to another individual without your consent. It’s also tough to remove a co-owner from the property title without his or her full cooperation.

Creditors. Another issue with jointly held property is that it’s subject to creditors’ claims against both owners. If your brother, as a co-owner of your cabin, has financial troubles and files for bankruptcy, his ownership in the cabin could possibly be claimed by a creditor. He could also be forced to sell it to pay off his debts. So, unless you can buy out his ownership in the cabin, you may now own the property with a stranger.

Potentially Higher Taxes. Adding a non-spouse as co-owner of an asset, allows for a simple property transfer at your passing. However, it could also mean both a gift tax to you and an increased capital gain tax for your heir. By adding a non-spouse to the property title, you’re making a gift to the new joint owner. Therefore, based on the current value of the property being gifted, you could be liable for gift tax. In addition, the heir of the property may have to pay increased capital gain taxes. Property transferred at death receives a step-up in basis. This means the heir’s cost basis is equal to the fair market value of the property at your death, instead of your cost basis (the amount you paid for the property). Receiving a step-up in basis reduces the heir’s capital gain on the appreciation of the property when it’s sold. However, if you add a co-owner, only your interest in the asset has the benefit of stepped-up basis at your death, not the entire property. When the property is sold, this may mean a higher capital gain tax.

JTWROS vs. Tenants in Common. When deciding to co-own an asset with another person, you can also enter into an ownership agreement known as “tenants in common.” Here’s a key difference: holding property JTWROS with another person means that when one owner dies, the other owner receives the property outright and automatically. When owning property as tenants in common with another person, when one owner dies, the owner’s heirs receive his share in the property. A co-owner can again transfer his interest in the property without approval as the other co-owner. This loss of control may place you in a difficult position.

When considering property ownership with another party, look at the pros and cons of both JTWROS and tenants in common. The cons usually outweigh the pros. However, if owning property with a non-spouse is what you want, discuss this with a qualified estate planning attorney.

Reference: Inside Indiana Business (December 1, 2019) “Risky: Property Owned with a Non-Spouse”

How Can I Protect My Real Estate Investments?

“If you’ve decided to join the real estate industry, asset protection is paramount. Just like in most industries, investing in real estate has its shortcomings. Adopting different asset protection strategies for your real estate will secure your property.”

How can a person protect a real estate asset to ensure its value? That’s what Wealth Advisor’s recent article, “8 Reliable Ways to Protect a Real Estate Asset,” asks. The article suggests that you look at this guide for several ways to keep your investments valuable.

1. Insurance. This is one of the most popular asset protection strategies in real estate. The protection you select for your property depends on the real estate type. You can protect your home with a homeowner’s policy and your commercial property with a business policy. Insurance will protect you against many catastrophic events.
2. Limited Liability. An LLC for rental property can protect your personal assets from potential lawsuits. With limited liability, your home is shielded from litigation concerning your business. One strategy is to buy a house with an LLC and rent it to yourself to minimize financial risks. This will limit the odds of personal real estate asset seizure. However, consult with an attorney to avoid charges on fraudulent practices. You should also place your commercial real estate properties in different LLCs, so if one asset faces a risk, the remainder of your property will be protected.
3. Anonymous Land Trust. You can create an anonymous land trust to avoid legal implications on your real estate property. With a trustee, you don’t need to have your name on records, so putting your house in a trust will protect your investment. This may discourage anyone from attempting to pursue a lawsuit against you.
4. The Titling of Assets. This can also be a great protection strategy. If your spouse is an equal tenant, it provides you with an indivisible interest, so if your spouse is involved in litigation, creditors can’t claim your house because you have an interest. Ask your estate planning attorney about how this works in your state.
5. Protection Through Debt. Debt is an affordable way to protect your real estate property because the available equity is insignificant. The low income may also discourage creditors from going after your property.
6. Eliminating Assets. You can get rid of your real estate asset, if creditors are on your tail. A lawsuit against you can’t affect the property that’s not under your name. Ask your attorney about transferring ownership of the property to irrevocable trusts.
7. Homestead Exemptions. In some states, the homestead laws provide full or partial protection of home equity. If the exemption is high, think about increasing your mortgage payment to promote fund protection.
8. Avoid Risky Situations. As a real estate investor, do your due diligence. Be certain that your review contracts carefully and work with an attorney.

Consider these property protection strategies to ensure that your real estate assets remain secure.

Reference: Wealth Advisor (November 19, 2019) “8 Reliable Ways to Protect a Real Estate Asset”

How Do I Title Our Property as Tenants in Common?

“This method is actually the default ownership method in Oklahoma, i.e. if you simply title ownership as “joint ownership” the form of ownership assumed will be as a tenant in common.”

There are several ways to hold property. They include ownership as an individual and property held as joint tenants with right of survivorship. A third major form of ownership is “Tenancy in Common.”

The Pauls Valley Democrat says in its article “How to title your property as tenants in common” that ownership as a tenant in common provides an undivided interest in the whole property (i.e., an undivided one-half, one-third, etc.). This interest in property stands on its own and can be bought and sold. This form of title is the best option for two or more people who want to keep their title separate during life and after death.

In practice, this ownership is a bit theoretical because an undivided interest provides a partial ownership of the entire property—but not a total ownership of any part of the property. Therefore, an undivided one-half owner has the right to use the entire property, including the right to benefit from one-half of the rent, lease, or crop share.

When several individuals own an undivided interest, the control, usage, and management can become complex and troublesome, especially when one of the co-tenants spends their own money to improve the property, which benefits the other co-tenants.

Tenancy in common offers a benefit because the interest is transferable and can be sold or otherwise transferred, without affecting the other owners. However, the value of a partial ownership is decreased in value, because of the potential limitations on sharing with the other owners.

The following is an issue that can occur, if a husband and wife own their property as tenants in common. If one spouse dies, his or her undivided interest remains as a part of the estate. As a result, his or her estate has to be probated for a clear transfer of title to the surviving spouse or to other heirs. It’s an expense for the survivor that could have been avoided, if another form of ownership were implemented.

Another thought with co-tenancy is a debt of one of the co-owners. The death of one of the co-tenants does not terminate the ability of his or her creditors to file a claim against the property as a part of a probate.

Each owner has the right to sue to split the property in a suit for partition, and the other owners may at any time face such action. Typically, real property can’t be fairly split into equal pieces. Thus, there’s a sale of the property by the court and then a split of the money after the sale. This isn’t a good option in many cases. Plan in advance, rather than react after the fact.

Reference: Pauls Valley Democrat (October 2, 2019) “How to title your property as tenants in common”

How Should I Title My Property in My Estate Plan?

“The form of ownership is a key factor in structuring an estate plan. This is true primarily because the form of ownership governs the transferability of the interests.”

Pauls Valley Democrat’s recent article, “Considerations in how to title your property,” says that there are several types of “automatic” transfer of property methods that don’t require probate.

The first is Joint Tenancy with Right of Survivorship. This form of ownership passes title to the survivor immediately upon death and avoids probate. The transfer to the survivor happens automatically at the death of one of the joint owners.

To complete the transfer, one must confirm the death in the county records and effectively give notice that one joint tenant has died, and that the ownership is now in the survivor(s) name. This is usually accomplished, by having the survivor complete an Affidavit of Surviving Joint Tenant. The affidavit affirms the death of one party (in many cases a spouse), and the survivorship to title of the other party. This affidavit and a certified copy of the death certificate are filed with the county.

The survivor now owns the property as an individual. He or she can now sell or deed the property to others, including children, without a probate action to clear the title.

Next is Tenancy in Common. Ownership as a tenant in common gives an undivided interest in the whole property (like a third), which stands on its own and can be bought and sold. Tenancy in Common is used when two or more people want to keep their title separate from the other at death. Therefore, an undivided one-half owner has the right to use the entire property, including the right to benefit from one-half of the rent, lease or crop share. However, if several people own an undivided interest, control, usage and management can become complicated.

If, for some reason, a husband and wife own their property as tenants in common, and one spouse dies, his undivided interest remains as a part of his estate. In that case, his estate must be probated to provide a clear transfer of title to the surviving spouse or to other heirs.

It’s an added expense for the survivor that can be avoided, if another form of ownership is used.

Thinking through these factors is a critical component of successful estate planning. Plan in advance with the help of a seasoned estate planning attorney. Don’t create bigger problems for yourself or your heirs, by trying to avoid upfront costs.

Reference: Pauls Valley (OK) Democrat (August 21, 2019) “Considerations in how to title your property”

When Am I Told If I’m a Beneficiary of a Will?

“Wills must go to probate court to prove their validity. Beneficiaries of a will must be notified no later than three months after the will is accepted for probate.”

When someone dies, the distribution of their assets is hopefully determined by a clear and legally binding will. If not, the assets come under control of the state, and a probate court will decide how best to distribute them.

An Investopedia article from last month asks, “When Are Beneficiaries of a Will Notified?” The article explains that in situations where the assets are structured to avoid probate (like setting up joint tenancy or making an assets payable upon death), there are no specific notification requirements.

Since probated wills are public record, when there are assets subject to probate and the will is filed with the probate court, anyone who thinks he or she may be a beneficiary is entitled to look at the will at the courthouse.

Probate is the legal process of proving that a will is valid and is administered by a probate judge. The court examines the will and directs the executor to gather the deceased’s assets and distribute them to the heirs, according to the instructions in the will.

Once the probate court says the will is valid, all beneficiaries are required to be notified within three months (in many states), but notification typically will happen a lot sooner.

Many county courthouses have a department called “Register of Wills,” where probated wills may be viewed.

It is important to understand that probate isn’t required in all circumstances. If the decedent has assets below a certain threshold (determined by the specific state), probate may not be necessary.

Reference: Investopedia (June 18, 2019) “When Are Beneficiaries of a Will Notified?”

Are Your Company Benefit Plan Designations Up-to-Date?

“Upon passing, your will outlines who gets what, when and how (outright or in trust). Your named executor will submit the will to the proper court which determines its legitimacy and oversees the distribution of assets, a process called probate. However, not all of your assets are controlled by your will.”

On the first day of your new job, you probably talked to the Human Resources Director, who had you complete a huge stack of forms. You needed to sign off that you understood all the corporate policies and received the company handbook. You probably took a stab at how many exemptions to claim for payroll tax withholding, and also completed Form I-9 affirming your eligibility to work. In the stack was most likely a form to choose a medical plan, as well as a form to designate your beneficiaries for employee benefit plans. This might include life insurance, stock purchase plans and your company’s 401(k) plan.

Forbes’s recent article, “Company Benefit Plan Designations Can Lead To A Huge Estate Planning Blunder,” says that now, you should fast-forward to when you met with your estate planning attorney to sign your estate documents. After a few meetings, you probably felt good that this was checked off your to do list.

However, assets that have a form of joint or survivor ownership, or have named beneficiaries, pass on to heirs by law and aren’t part of your probated estate. This usually applies to homes, bank and investment accounts, life insurance, retirement plans and corporate asset accumulation plans. In other words, these are all the plans and accounts where you originally named beneficiaries, but probably haven’t changed those beneficiaries since your first day of work.

When you started your job, you probably named your spouse as your primary beneficiary. If you named a contingency beneficiary, it was probably your children. The secondary designation is probably not something to which you gave a lot of thought. However, if your spouse predeceases you, and if your plans designated your children as contingent beneficiaries, they would inherit all your company benefit plans at once, or upon reaching majority of age 18 or 21.

If that’s not what you want to happen, you need to review your work beneficiary designations. Chances are, you’d prefer to pass assets to your children in stages at, say, ages 25, 30, and 35. If you don’t make any changes, one of your largest bequests derived from employee stock plans and life insurance may not pass the way you want.

Talk to a qualified estate planning attorney for help concerning how your company’s benefits should be titled. The process of revising your beneficiary designations only takes a few minutes.

Reference: Forbes (April 22, 2019) “Company Benefit Plan Designations Can Lead To A Huge Estate Planning Blunder”

How Can We Save Our Inheritance from Taxes, if Dad Won’t Create an Estate Plan?

“If a person doesn't want to create an estate plan, you can't force them.”

Here’s a common situation that’s faced by adult children: Dad is in his 90s and has informed his four sons that they’ll receive an inheritance of roughly $250,000 each. Dad was a blue-collar worker who saved his entire life—just to benefit his boys. However, and this is the real common part, he doesn't want anyone to know he’s “rich.” Because of this, he’s never worked with an estate planning attorney.

With their mom already passed away, how can the four sons protect themselves from unnecessary taxes?

nj.com’s recent article asks simply, “My dad refuses to create an estate plan. Can I save my inheritance from taxes?” The article suggests that maybe the father in this scenario will change his mind, when he understands that estate planning will actually protect his privacy, although he’ll have to share his information with an attorney.

The reason is probate, the court-supervised legal process that gives an executor—typically the surviving spouse or another close family member—the authority to collect the deceased person's assets, pay debts and taxes and then transfer assets to the people who inherit them.

The process can be more complicated, if the deceased person didn't have a valid will but is otherwise similar. The probate process is part of the public record, and so is the father’s will. However, a person would have to proactively search for the records.

In light of this, the best way to keep financial information private is to make certain that the assets are transferred outside of the probate process. One very simple way to transfer assets outside of the probate process, is by using transfer-on-death accounts. A senior completes forms at his bank or brokerage firm, so that his assets will automatically (and privately) transfer to the children when he passes away. Likewise, life insurance, IRAs, and 401(k)s will also pass outside of probate, provided the beneficiary designations are not payable to his estate or left incomplete.

Joint tenancy with the right of survivorship accounts are also useful to avoid probate. However, they are typically only used between spouses. A living trust is another option to keep assets out of probate, especially if the parent owns any real estate.

As far as estate taxes, any inheritance left to a spouse is exempt from estate tax. However, an inheritance left to a non-spouse could be subject to estate tax, when it exceeds a threshold called an "exemption.” The federal exemption is now $11.4 million.

It’s best to speak with an attorney, who specializes in estate planning, to prepare a will and other documents, such as a trust, power of attorney and advance healthcare directive. However, none of these strategies will help, unless the dad in our scenario agrees to see a qualified estate planning attorney to help him accomplish his goals.

Reference: nj.com (February 28, 2019) “My dad refuses to create an estate plan. Can I save my inheritance from taxes?”

How Do I Leave My Home to My Family?

“For many people, their home is the most valuable asset they own. Leaving real estate to your heirs can also be a complicated process, so you'll want to make sure you plan accordingly.”

Figuring out what will happen to your assets after you pass away, is an unpleasant but necessary task. This ensures that your assets are distributed to the people you want. The publication, the day, recently published a story, “Planning to leave your home to your heirs,” that reminds us that it's best to begin your estate planning, as soon as possible.

Death can unexpectedly impact young or middle-aged families, and your family may not be sufficiently prepared, if you don’t have a will. Estate planning can make certain that your wishes are clearly stated and executed.

Real estate is frequently given to an adult child, grandchild, or is divided among several heirs. Once you know who will receive the property, discuss your plans with these people to keep them apprised of your plans and avoid any unpleasant surprises.

If you include your home in the will, you can stipulate precisely who should benefit from it. You can also say if you want the home to stay in the family or be sold.

Dividing the interest in a property evenly among beneficiaries might seem fair, but it can also create some unexpected complications. If one beneficiary wants to move into the home and another wants to sell it and split the proceeds, things could get dicey. Discuss this issue with your beneficiaries to resolve this potential conflict in advance. One beneficiary could buy out the other beneficiaries' shares in the property to take sole possession of it. However, you may need a life insurance policy to be sure that the cash is there for a buyout.

A will is also used to delegate responsibilities to certain heirs. You select an executor to oversee the disposition of your estate after your death.

An outstanding mortgage balance can cause some trouble, when passing on a property. Any debts you have at the time of your death, need to be paid before your estate can be settled. If you were still making mortgage payments, be sure your beneficiaries have a plan to avoid a default. Beneficiaries, a surviving spouse, the executor of estate, or any other party can continue to make payments to your bank to avoid a foreclosure process. There are several ways that your beneficiaries can resolve a mortgage, after they take possession of the home. In addition to just selling the property, they can refinance the loan or pay off the mortgage with any assets they have or receive from your estate. That way, they would own the home free and clear.

Review your will regularly to keep it up to date. Make a change if a beneficiary dies, if your own circumstances change, or if your relationship with an heir goes bad.

You can also transfer your home to a living trust. This lets you use and benefit from the asset while living and then transfer it to beneficiaries upon death. This will avoid the probate process and save heirs time and money. The trust document identifies beneficiaries and determines how the estate will be distributed after death. It can also name a trustee to oversee this process and avoid conflict among beneficiaries.

One downside of a living trust is that any outstanding debts must be taken care of before the home and any other assets in the trust can be transferred to beneficiaries.

If a beneficiary is comfortable with assuming some responsibility for owning your home, you can also update the deed to include them. This can be especially helpful, if your spouse isn’t currently on the deed. This will make transfer of the home easier. If the deed says: "transfer on death," you own the home outright until your death, then it passes to any beneficiaries you name in the deed. When the deed includes the words "joint tenant with right of survivorship," ownership of the home automatically transfers to any other co-owners on the deed, when you pass away.

Reference: the day (February 15, 2019) “Planning to leave your home to your heirs”

How Do I Keep From Disinheriting My Kids When I Remarry?

“For those who remarry and want to make sure certain assets get passed on to kids from a previous marriage, experts say it's important to do some estate planning—that is, figuring out how to legally ensure that when you die, your assets end up where you want them to.”

Roughly 17% of people remarry after the first marriage ends, and the rate of remarriage has decreased over time for all age groups except the 55-and-older group. That rate was 57% in 2013 compared to 42% in 1960. CNBC brings up some practical pointers in its recent article, “Remarried after having kids? Here are tips to avoid accidentally disinheriting them.” As the article notes, if you've remarried and want to pass on assets to your children from a previous marriage, don't overlook the importance of estate planning.

Many people don’t have even a basic will. The risk can be higher, if you have no estate planning when you remarry—your children could unintentionally be disinherited.

The older you are when you remarry, the more apt you are to be bringing assets into the marriage, such as retirement savings, life insurance, brokerage accounts, real property and family heirlooms. Estate planning helps to avoid family conflict.

If you die without a will (intestate), a judge will decide who gets what. Of course, everyone’s situation is different, and some can be more complex than others. However, here are some keys to consider, when thinking about how to make sure your heirs end up with the assets you want them to have.

Account beneficiaries. It’s easy to miss this when you remarry. Update the beneficiary designations on retirement accounts, life insurance policies and other accounts. This designation supersedes any intention stated in your will.

Your home. Remarriage frequently involves a jointly-owned home. Depending on state law and how the property is titled, your intention for your children to inherit your share of it could be thwarted.  If the house is deeded as "joint tenancy with right of survivorship" or "tenancy by the entirety," the property typically automatically belongs to the surviving spouse, regardless of what your will says. If you own the house in "tenancy in common," you can leave your share to a person other than your spouse, if you want.

Your personal property. If you want your children to get some particular items when you pass away, be as detailed as possible in your will, so there is no room for confusion.

Power of Attorney. Select someone to handle your finances, if you reach a stage where you can’t. A durable power of attorney for your finances allows that person to be in charge of paying bills and filing tax returns. A durable power of attorney over health care permits the named person important health-care decisions, if you are unable.

Living Will. This states your wishes if you’re placed on life support or suffer from a terminal condition. It helps guide your proxy's decision-making, and if you have no one named, your doctors must follow your wishes in that document.

Creating an estate plan can help ensure that your assets wind up where you want, and your wishes are carried out fully.

Reference: CNBC (January 17, 2019) “Remarried after having kids? Here are tips to avoid accidentally disinheriting them”

Should I Give Access to My Checking Account to My Adult Son in Case of an Emergency?

“Setting up joint accounts between parents and children may seem like an effective way to prepare in case of emergency or if people need help with finances as they get older, but it can cause some big tax and estate problems. Here's a dual strategy to consider instead.”

It's not uncommon for an elderly parent to go to the bank to add a child to his or her bank account “in case something happens to me.”

The reason why most parents do this, is to give their child access to their money during an emergency. It sounds like it should be a pretty easy process. With proper planning, it can be. However, parents should know that simply making a child the joint owner of a bank account (or investment account or safe deposit box) can have unintended consequences. Sometimes this isn’t the best solution during a family crisis.

As Kiplinger’s recent article, “The Trouble with Joint Bank Accounts 'Just in Case'” explains, the vast majority of banks set up all of their joint accounts as “Joint with Rights of Survivorship” (JWROS). This type of account ownership typically says that upon the death of either of the owners, the assets will automatically transfer to the surviving owner. However, this can create a few unexpected issues.

If Mom’s intent was for the remaining assets not spent during the family crisis to be distributed by the terms of a will, that’s not happening. That’s because the assets automatically transfer to the surviving owner. It doesn’t matter what Mom’s will says.

Remember that adding anyone other than a spouse could create a federal gift tax issue, depending on the size of the account. Anyone make a gift of up to $15,000 a year tax-free to whoever they wish, but if the gift is more than $15,000 and the beneficiary isn’t the spouse, it could trigger the need to file a gift tax return.

For example, if a parent adds a child to their $500,000 savings account, and the child predeceases the parent, half of the account value could be includable in the child’s estate for state inheritance tax purposes, like in Pennsylvania. The assets would transfer back to the parent, and, depending on the deceased’s state of residence, state inheritance tax could be due on 50% of the account value. In Pennsylvania, the tax would be 4.5%, which would mean a state inheritance tax bill of more than $11,000.

However, if Mom’s intent in adding a joint owner to her account is to give her son access to her assets at her death, there’s a better way to do it. Most banks let you structure an account with a “Transfer on Death,” or TOD. With a TOD, if the beneficiary passes before the account owner, nothing happens. There’s no possibility of a state inheritance tax on 50% of the account value. When the account owner dies, the beneficiary has to supply a death certificate to the bank, and the assets will be transferred. These assets are transferred to a named beneficiary, so the time and expense of probating the will are also avoided, because named beneficiary designations supersede the will. This is the same for pensions, IRAs and life insurance policies.

Setting up an account as TOD doesn’t give the beneficiary access to the account, until the death of the account owner. Therefore, the change in titling isn’t considered a gift by the IRS, which eliminates the potential federal gift tax issue.

There’s no such thing as a joint retirement account because IRAs, 401(k)s, annuities, and the like can only have one owner—it’s not possible to make someone a joint owner. However, if a parent becomes incapacitated, they still often would like their child to have access to all their assets, in addition to their bank accounts. The answer for these is a financial power of attorney. This is a document that lets one or more people make financial decisions on your behalf. This document should be drafted by a qualified estate planning attorney.

It is important to understand that many financial institutions require a review process of a financial power of attorney appointment. The bank’s legal department may want to review the document before allowing the designated person to make transactions. This can take several weeks, so be sure that all financial institutions where you have accounts have a copy of your executed financial power of attorney. Have it in place before it’s needed.

Talk to your estate planning attorney about what you’re trying to do and let her guide you. Planning in advance will make things much easy for your loved ones, in case of an emergency.

Reference: Kiplinger (November 14, 2018) “The Trouble with Joint Bank Accounts 'Just in Case'”