When we think about the property passing at death, it is always the will which comes to mind. By no means, however, is the will the only method of creating a benefit for loved ones at death. In fact, several other methods are very commonly used, sometimes without even recognition of the consequence. We can refer to these various methods of transfer as “will substitutes” because of the way they operate.

A. Joint Property

All sorts of property can be owned by two individuals as joint tenants with right of survivorship. An important aspect of this type of ownership is that upon the death of one of the named owners, the other becomes sole owner of the entire asset. We see joint ownership used most often with bank accounts or securities. Joint ownership could be created in real estate, a car or other tangible property or in business assets.

Once such ownership is created, the passage of the property to the surviving joint owner is automatic at death. Although this provides simplicity, there are a number of consequences to joint ownership which are typically ignored or overlooked. When you add a name as a joint owner on your bank account, immediate rights are created for that owner. For example, the joint owner would be free to draw upon the bank account just as you could.

If you removed him from title on the account, or withdrew all of the funds, he might sue you for return of the one-half belonging to him. Similarly, if the joint owner got into financial difficulty, or entered a nursing home, his creditors would look to take his one-half. This is so, even though you supplied all of the funds to create the account.

With certain types of property, the creation of a joint ownership constitutes a gift for gift tax purposes. If the value attributable to the new joint owner exceeds $15,000, a gift tax return could be required. When you die, the same property could be taxable in your estate for estate tax purposes. If property is jointly owned between husband and wife, only one-half of the value is includable in the estate. If the joint ownership is with anyone other than the spouse, there is a presumption that the owner who died provided all of the funds, and that the entire account is therefore taxable. Joint ownership is a very poor method to choose for handling one’s financial affairs. Very often an older person will put a child’s name on the bank accounts so the child can help pay the parent’s bills. Upon death, there will be a presumption that the accounts were not so titled for convenience, but rather that the child was meant to receive all the money in the account. This is not always the desired result from the parent’s standpoint.

B. Totten Trust Accounts

Another method of owning a bank account is the Totten trust. This is not truly a trust, but rather a beneficiary form of bank account ownership. You will typically see the title of such an account read “John Doe in trust for Mary Doe.” Unlike the joint bank account, the Totten trust does not pass rights to the beneficiary when it is created. Only at the death of the primary owner does the beneficiary receive the funds. The owner is free to remove the beneficiary designation at any time, or to change it to someone else. In fact, the owner can even change or remove the beneficiary designation on a Totten trust by the terms of his will. An important advantage of the Totten trust is that it eliminates many of the risks of joint ownership. It has no tax advantage, but at the same time is has no disadvantage. All funds contained in such accounts are fully includable in the estate of the owner for estate tax purposes. In an extremely simple situation (for example a widow or widower with only one child) the Totten trust account can be a very useful estate planning tool.

As the number of beneficiaries begins to increase, however, the chance of confusion and unfairness also increases with the Totten trust. For example, if one were to create three equal bank accounts for each of three children using the Totten trust account it would first appear that the beneficiaries would all benefit equally at the owner’s death. It is not necessarily so. As the owner needs funds to pay bills or for other reasons, he will not likely withdraw from each account in an equal amount. This will result in one child’s account being significantly smaller than another, or even being depleted entirely. The Totten trust account does not provide for any method of correcting such inequities the way a will could. If a Totten trust beneficiary dies first, the account would pass by the owner’s will (not to the children of the beneficiary). This can create yet another unfair distribution.

C. Real Estate

Titles Real estate may be owned as joint tenant with right of survivorship. When a husband and wife take title together, this creates a tenancy by the entirety. This is a type of joint ownership which results in the surviving spouse owning the entire property, just as with joint ownership. Real estate title may also be held as “tenants in common.” Unlike joint tenancies, the surviving tenant in common does not own the entire property. If two owners have a tenancy in common and one dies, the 50% share of the decedent would pass pursuant to his will or by intestacy, not necessarily to the other tenant in common. The ownership shares of a tenancy in common are not specifically identified in the property. For example, one does not own the left side and the other the right of the property. Rather, the entire property (undivided) is owned in percentages by each.

D. Ownership

With Infants Nothing prevents joint tenancies, Totten trusts or tenancies in common from being created between an adult and a child under the age of 18. If the adult owner died, however, problems can arise. A person under 18 years of age is not legally competent to manage property alone. If an infant was a surviving joint owner on securities, it would be impossible to sell the shares without the appointment of a guardian in Surrogate’s Court. That is the case even though the infant’s parents may be alive and well at the time. One solution to the problem of infant beneficiaries in titles is to substitute an adult custodian under the Uniform Transfers to Minors Act (UTMA) in place of the infant’s name. This allows an adult custodian of your choice to manage the property until the child reaches age 21. The custodian would be empowered to sell such assets and change to other investments and could use the funds for the child’s education or other needs.

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