What Happens With Joint Property?

Virtually every estate administration case we handle joint property, or “joint tenancy” as it is sometimes called.  This is most commonly true when the decedent was married, but often occurs when a deceased parent included a child on their bank account or a friend so that “money is available” when something happens to them.  But, joint property can have unintended consequences to your estate, so it is important to understand the different types of joint property according to a recent article titled “Everything you need to know about jointly owned property and wills” from TBR News Media.

This becomes an important issue because depending on the type of joint tenancy, your Will may or may not be necessary to convey it to your beneficiaries. It is also true that using certain types of joint tenancy may bypass your intended estate plan or have tax, government benefits and other consequences, so it is critical to understand the differences and to ensure the type of joint tenancy you are using matches your plan.

Joint Tenancy with Rights of Survivorship. Joint tenancy with rights of survivorship means that there are multiple owners and that upon the death of one, the other owners automatically become the owner of the account.  This process happens by virtue of the titling, and doesn’t require probate to make it happen.  Usually, a death certificate is sufficient to remove the deceased owner.

Most people assume when they see two owners on a bank account that it is owned as joint tenants with rights of survivorship.  In truth, this is something that you elect when you create the account or add a name, and many times bank personnel elects this without discussing it with you.  The best way to determine if your account has rights of survivorship is to check with account card at the bank, although some statements or accounts will also say “JTWROS.”  That is short for “Joint Tenants with Rights of Survivorship”.

Tenancy by the Entirety. This type of joint ownership is only available between spouses and is not used in all states. It definitely exists in Pennsylvania, and is the default way of taking title to real property that is purchased during marriage.  A local estate planning attorney will be able to tell you if you have this option. As with Joint Tenancy with Rights of Survivorship, when the first spouse passes, their interest automatically passes to the surviving spouse outside of probate.

There are additional protections in Tenancy by the Entirety making it an attractive means of ownership. One spouse may not mortgage or sell the property without the consent of the other spouse, and the creditor of one spouse can’t place a lien or enforce a judgment against property held as tenants by the entirety.

Tenancy in Common. This form of ownership has no right of survivorship and each owner’s share of the property passes to their chosen beneficiary upon the owner’s death. Tenants in Common may have unequal interests in the property, and when one owner dies, their beneficiaries will inherit their share and become co-owners with other Tenants.

The Tenant in Common share passes the persons designated according to their will, assuming they have one. This means the decedent’s executor must “probate” the will for the executor to have control of it. Sometimes this is very critical to leave assets as Tenants in Common because you want your portion of an asset to go to a trust or not to the other owner.

In all of these, it is important to recognize that joint tenants are not always necessary.  First, adding a co-owner could affect your estate plan, as is generally described above.  Also, adding a person is a gift, which may have adverse effects on your beneficiary if they suffer a disability, and has gift tax consequences to yourself.  It may also subject “your” money to the creditors of the new owner.

For those who only want “check writing authority,” it actually is possible in Texas to get authority to sign checks only without being an owner, although most banks encourage joint ownership as it is less risky to them.

All in all, it is important to makes sure that the ownership and titling of your assets fits with your estate plan.  A comprehensive estate plan, created by an experienced estate planning attorney, ensures that both probate and non-probate assets work together.

Reference: TBR News Media (Dec. 27, 2022) “Everything you need to know about jointly owned property and wills”

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What Is “Income in Respect of Decedent?”

Estate administrators file a decedent’s taxes, and often that means income in respect of a decedent, which is post-death income.

While in a consultation recently, an executor brought up a discussion with a prior attorney.  The executor was told that the estate was “too small” to worry about taxes.  Although that was true for one tax, i.e. the Federal estate tax, there are actually multiple death taxes for executors to consider in an estate administration, most of which apply in more cases than the estate tax and are often overlooked by executors.

For example, every executor, trustee or administrator should consider “income in respect of a decedent” or “IRD”.  This kind of income has its own tax rules and they may be complex, says Yahoo! Finance in a recent article simply titled “Income in Respect of a Decedent (IRD).”

Incidentally, if you were looking for information on the estate tax, here are the basics.  https://galligan-law.com/what-exactly-is-the-estate-tax/

Income in respect of a decedent is any income received after a person has died, but not included in their final tax return. When the executor begins working on a decedent’s personal finances, things could become challenging, especially if the person owned a business, had many bank and investment accounts, or if they were unorganized.

What kinds of funds are considered IRDs?

  • Uncollected salary, wages, bonuses, commissions and vacation or sick pay.
  • Stock options exercised
  • Taxable distributions from retirement accounts
  • Distributions from deferred compensation
  • Bank account interest (very common one)
  • Dividends and capital gains from investments
  • Accounts receivable paid to a small business owned by the decedent (cash basis only)

As a side note, this should serve as a reminder of how important it is to create and update a detailed list of financial accounts, investments and income streams for executors to review in order to prevent possible losses and to correctly identify sources of income.

How is IRD taxed? IRD is income that would have been included in the decedent’s tax returns, if they were still living but wasn’t included in the final tax return. Where the IRD is reported depends upon who receives the income. If it is paid to the estate, it needs to be included on the fiduciary return. However, if IRD is paid directly to a beneficiary, then the beneficiary needs to include it in their own tax return.

If estate taxes are paid on the IRD, tax law does allow for an income tax deduction for estate taxes paid on the income. If the executor or beneficiaries missed the IRD, an estate planning attorney will be able to help amend tax returns to claim it.

Retirement accounts are also impacted by IRD. Required Minimum Distributions (RMDs) must be taken from IRA, 401(k) and similar accounts as owners age. The RMDs for the year a person passes are also included in their estate. The combination of estate taxes and income taxes on taxable retirement accounts can reduce the size of the estate, and therefore, inheritances. Tax law allows for the deduction of estate taxes related to amounts reported as IRD to reduce the impact of this “double taxation.”

The key here is to work diligently with your tax preparer in an estate or trust administration to identify, report and pay for IRD.  Happily, estates have several costs which might be deductible to the IRD paid by the estate, such as funeral or administrative costs, meaning it is very possible no tax will be due even where there is substantial IRD.

In all events, if you are administering an estate you want to ensure IRD is addressed, and paid for if necessary.  One of the most important aspects of estate administration is providing a sense of finality, knowing that the legal and financial steps are finished so you can focus on your family in a difficult time.  Addressing the IRD ensures you don’t receive a letter from the IRS years later about unreported income.

Reference: Yahoo! Finance (Oct. 6, 2021) “Income in Respect of a Decedent (IRD)”

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How Does a Charitable Trust Work?

Charitably-inclined clients often utilize charitable trusts as they give to charities while providing income and estate tax benefits.

A charitable trust can provide an alternative to meeting your wishes for charities and your loved ones, while serving to minimize tax liabilities. Attorneys often utilize them for charitably-inclined clients to reduce estate tax or capital gains tax on assets directed to the the charitable trust. There are pros and cons to consider, according to a recent article titled “Here’s how to create a charitable trust as part of an estate plan” from CNBC. Many families are considering their tax planning for the next few years, aware that the individual income tax rates may go up in the near future, as well as anticipating a drop in the estate tax exclusion amount.  Although the values will be changing, you can see this article for a decent overview of the estate tax itself.  https://galligan-law.com/what-exactly-is-the-estate-tax/

Creating a charitable trust may work to achieve wishes for charities, as well as loved ones.

Speaking very generally, a charitable trust is a set of assets held in a trust to benefit a charity, or possibly a charitable foundation created by the donor, for a period of time.  The time could be very short term for income tax benefits, or much longer term for estate tax benefits. The assets are then managed by the charity for a specific period of time, with some or all of the interest the assets produce benefitting the charity.When the period of time ends, the assets, now called the remainder, can go to heirs or even kept by the charity (although they are usually returned to heirs).

A charitable trust allows you to give generously to an organization that has meaning to you, while providing a generous tax break for you and your heirs. However, to achieve this, the charitable trust must be irrevocable, so you can’t change your mind once it’s set in place.

Charitable trusts provide a way to ensure current or future distributions to you or to your loved ones, depending on your unique circumstances and goals.

The two main types are Charitable Remainder Trusts and Charitable Lead Trusts. Your estate planning attorney will determine which one, if any, is appropriate for you and your family.

A Charitable Remainder Trust, or CRT, provides an income stream either to you or to individuals you select for a set period of time, which is typically your lifetime, your spouse’s lifetime, or the lifetimes of your beneficiaries.  The remaining assets are ultimately distributed to one or more charities.

By contrast, the Charitable Lead Trust (CLT) pays income to one or more charities for a set term, and the remaining assets pass to individuals, such as heirs.

For CRTs and CLTs, the annual distribution during the initial term can happen in two ways; a Unitrust (CRUT or CLUT) or an Annuity Trust (CRAT or CLAT).

In a Unitrust, the income distribution for the coming year is calculated at the end of each calendar year and it changes, as the value of the trust increases or decreases.

In an Annuity Trust, the distribution is a fixed annual distribution determined as a percentage of the initial funding value and does not change in future years.

Interest rates are a key element in determining whether to use a CLT or a CRT. Right now, with interest rates at historically low levels, a CRT yields minimal income.  The key benefits to a CRT include income tax deductions, avoidance of capital gains taxation, annual income and a wish to support nonprofit organizations.

Your estate planning attorney can work with you to determine whether a charitable trust  will serve your charitable strategy and achieves your goals of supporting the charity and building your legacy.

Reference: CNBC (Dec. 22, 2020) “Here’s how to create a charitable trust as part of an estate plan”

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