Why Clients Who Own Property Jointly Still Need to Engage in Estate Planning

If your clients own property or other assets jointly, say, with a spouse, they may believe there's no need for them to write a will. After all, everything would just go to their partner if they passed unexpectedly, right? Expert Julian Block explains why this is a mistaken belief in his latest column.

Aug 5th 2020
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For reasons that make lots of sense to my clients, many of them place their homes, securities and other assets in joint ownership with their spouse or children. A characteristic of joint ownership is the right of survivorship—the co-owner who dies first loses all ownership in the property and the surviving co-owner acquires all ownership.

Many individuals mistakenly believe that owning jointly relieves them of the need to write a will. To be sure, property owned jointly will pass on the death of one co-owner to the surviving co-owner, even though the deceased co-owner has left no will. Additionally, it enables them to avoid some of the costs and delays of estate administration.

Still, joint ownership isn’t a cure-all. I have a client I’ll call Mae. I caution her and other co-owners not to focus only on the seeming advantages. In most cases, it’s inadvisable for them to use joint ownership as a substitute for a will. I mention several key caveats.

For starters, it’s difficult for Mae to put all of her property in joint ownership. In trying to do this, she’s bound to overlook some items. The long list of possibilities includes jewelry, art collections and other kinds of collectibles.

I tell Mae more than she’ll ever want to know about the dire things destined to happen if she spurns my advice and dies without a will. In particular, her overlooked assets aren’t going to wind up with the individuals she intended to benefit. Instead, they’ll pass in accordance with her state’s impersonal and inflexible intestacy rules. (Intestate is the legal term for someone who dies without a will or writes one that’s invalid.)

Consequently, the intestacy rules could bestow assets on individuals whom Mae never intended to benefit or whom she considers to be less deserving of her largess than others. Those troublesome rules also kick in when two co-owners who’ve not made wills die simultaneously or under circumstances that make it impossible to determine which of the individuals was the first to die.

Another possible drawback: Mae’s assets go directly to the survivors. With a will, she’s able to control who gets how much and when, so it’s harder for surviving beneficiaries to spend their inheritance too rapidly or dissipate it unwisely. To entice Mae and other recalcitrant clients to prepare wills, I spin yarns about beneficiaries who blew their inheritances on slow horses and fast women.

I’ll end with another yarn, a lengthier one that involves death and taxes. The story begins when intestate Mae kicks off and her estate’s assets are acquired by her surviving co-owners.

I’ll call them nephew John and niece Mary, cousins who pale visibly when they become aware that the IRS intends to examine auntie’s returns. Their dismay deepens upon their discovery that she kept no records (or they’re lost) to justify the amounts shown as income, deductions and other figures on her 1040s.

IRS audits frighten them. They recall family gatherings during which Mae’s interminable boasts that her returns were riddled with imaginative under statements of income and over statements of deductions would cause her to become convulsed.

They also remember Mae as a Renaissance woman who was eager to venture beyond tax returns, someone who wanted to captivate her captive audiences with the spicy details of her multiple marriages and donnybrook divorces.

They can’t forget raconteur Mae, who would embellish her repertoire with astonishingly graphic descriptions of liaisons with A-listers in the fields of accounting, law and financial planning. When asked to identify them, she demurred and invoked John 8:7. Cast not the first stone.

While both cousins fondly recall family gatherings, both fear their acquired assets will be, at least, deeply diminished or, worse yet, vanish, should the IRS hold Mae’s estate liable for hefty amounts of additional taxes, interest, and penalties. Despite their concerns, both are, at first, unfazed by what IRS investigators might uncover, an assurance attributable to their mistaken belief that the IRS can’t grab anything from an estate that’s bereft of assets.

But they then thought to obtain an outsider’s confirmation and shell out a considerable amount for a confab with nationally recognized CPA and author Debbie Downer. True to form, Debbie welcomes them with a reminder that their outlay is no longer deductible.

The hitch? A change introduced by the Tax Cuts and Jobs Act that Congress passed and President Trump signed in the closing days of 2017.

Debbie decides to quickly conclude the confab, as she previously watched Groundhog Day many times. She cuts to the chase and, not needing to crack open a copy of the Internal Revenue Code, she mentions Code Section 6091.

This provision empowers the IRS to collect taxes from “transferees of property,” and, understandably, it expansively defines “transferees.” But even a crabbed definition, she emphasizes, would target sitting ducks John and Mary, recipients of assets from Mae’s estate.

As the confab ends, Debbie beams because she has another zinger for her clients. The estate also must reckon with state income taxes, and the IRS routinely shares audit results with state tax authorities.

While morose Mary is still seated, Debbie dons her hats of author and literary agent and alludes to another Mary, author of a tell-all that became an immediate best-seller. Author Debbie counsels her Mary to write bombshell books about auntie’s assignations. Agent Debbie offers to pair her with a publisher and mentions big bucks from book advances and from lectures, but stays sotto voce on lucrative agent’s commissions.

A final thought: It would be remiss on my part not to mention that Debbie has edited and always noticeably improved the closing-in-on-almost-400 articles that I’ve done for AccountingWeb.com. It’s only because of her help that I became aware that I’m a gifted writer.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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