The Simplicity of Joint Tenancy and No Will

Dear Len & Rosie,

My husband of 30 years recently passed away without a will. Our home is in joint tenancy, so I know that an affidavit of death of joint tenant should be recorded with the County Recorder. Our cars were titled both our names, and all our bank accounts were also joint tenancies. Other than a small IRA, of which I am listed as the beneficiary, everything was in both of our names. As I see it, all of our assets now will pass to me and there is simply no estate to probate. Or am I over-simplifying things?

Susan

Dear Susan,

Everything you wrote is pretty much correct, but you are only half way there. You should obtain date-of-death values for any non-IRA securities you own, and you may want to have your home appraised, to establish the new cost basis for your assets. But what’s going to happen when you die? If your husband died without a will, you probably don’t have an estate plan of your own. Get one.

If you die without a will, your children, if you have any, will inherit your estate in equal shares by intestate succession. But what if they die before you? Your estate could fall into the hands of minor or spendthrift grandchildren who may not be responsible enough to manage an inheritance. Even worse, if a disabled child or grandchild inherits from you, he or she may lose eligibility for Social Security and Medi-Cal benefits unless the inheritance is held within a Special Needs Trust.

At the very least you should have a will that spells out how your estate is to be divided, a durable general power of attorney for financial decisions, and an advance health care directive so the loved ones you pick can make important medical decisions on your behalf if you become incapacitated.

But what you really ought to do is to create a revocable trust to avoid probate. If your estate is worth, $600,000 upon your death, then a happy lawyer will earn $15,000 in statutory probate lawyer fees. If you are worth $1,000,000, an even happier lawyer will earn a base fee of $23,000, for exactly the same amount of work. If your home is held within a trust upon your death, it won’t be subject to probate, and the legal and administrative expenses of distributing your assets to your children will be much less.

Now you may be thinking, why not avoid probate by putting my home into joint tenancy with my children? Don’t do this. Your children may not give it back if you ask for it and your home would become subject to the claims of their creditors. A revocable trust will allow your assets to avoid probate on your death while keeping you in charge for as long as you want.

Finally, don’t forget your IRA. You should roll over your husband’s IRA to one of your own. Just don’t forget to name your children as your IRA beneficiaries. If you forget and your IRA pays into your estate when you pass, then the IRA must be cashed in within five years of your death and your children will lose the opportunity to stretch out IRA distributions over their own lifetimes.

Len & Rosie

Is it really necessary to restate your A/B Trust

Dear Len & Rosie,

We have a living trust that we created ten years ago. I believe the trust is called an “A/B Living Trust.” Over the last ten years we have kept all assets in the trust.  The company that created the trust has called and said that it is a good idea to restate the trust especially because it is an A/B trust. Of course they want us to pay for it. Is it really necessary to restate the trust given that we haven’t changed our beneficiaries, or our assets?

Christine

Dear Christine,

The way your A/B trust works is that upon the death of the first of you to die, the trust is divided into two or sometimes three subtrusts. The A trust (for the above-ground spouse) holds the surviving spouse’s assets.  The B trust (for the below ground spouse) holds the dead spouse’s assets.

The B trust, frequently called the “Bypass” or “Exemption” or “Decedent’s” trustis an irrevocable trust funded with the portion of the deceased spouse’s assets that pass free of Federal Estate Tax. The surviving spouse usually gets all of the income of the B trust, and may dip into the principal of the B trust if the A trust assets and assets outside the trust are insufficient to pay for the surviving spouse’s needs.

When you created your trust, there was a lot of uncertainty as to the future of the Federal Estate Tax. Under the 2001 tax law, the Federal Estate Tax exemption was supposed to drop to only $1,000,000, in 2011. So if you and your spouse had more than that ten years ago, then an A/B trust was right for you, at that time.

Times are different now. The estate tax exemption today is $5,430,000, and will increase annually with inflation. The surviving spouse can also take the dead spouse’s exemption for himself or herself, allowing a married couple to pass in excess of $10,000,000 without paying any estate tax.

You may want to keep the A/B trust the way it is if you and your husband want to restrict the ability of the surviving spouse to change things. This can be very important in blended families with children from prior marriages, because while most spouses want to leave everything to one another, they still want their children to inherit it all in the end.

Having said that, what you should do is to amend your existing trust by replacing the entire document with a restated trust. This is better than making an entirely new trust, because you won’t have to remove your assets from your old trust and put them into a new trust. Most well-drafted ordinary trusts for married couples include an optional disclaimer trust, so that if it turns out that you are too wealthy for estate tax purposes, the surviving spouse may disclaim assets passing from the deceased spouse in order to avoid the estate tax on the second death. Disclaimed trust assets would then be held in the disclaimer trust, which still provides income to the surviving spouse and the ability to dip into the trust principal if needed.

Len & Rosie