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Estate Planning Without a Trust or Will?

Columnist: Susan M. Teel
May, 2011 Issue

Susan M. Teel
All articles by columnist
Prior to the 2010 Tax Act, individuals were locked into using tax-based formula planning in wills or trusts to eliminate or defer estate tax. But since January 2011 and at least until 2013, individuals can gift $5 million (the “exemption”) of assets, and couples $10 million, tax-free, without using will or trust formula planning. Additionally, if the first spouse to die leaves an estate of less than $5 million, that spouse will have unused exemption (the difference between $5 million and the estate value, called the “Deceased Spouse’s Unused Exemption Amount” or “DUESA”), which the surviving spouse may use at death by adding it to his or her own exemption. These carryover provisions of leftover exemption are allowed under the “portability” provisions of the 2010 Tax Act. Given these generous provisions, more than 90 percent of us no longer have to use wills or trusts simply to avoid tax!

So, if tax concerns vanish, what about “do it yourself” alternatives? Seven common tools for transfer planning without a will or trust include:

Joint tenancy. Owner takes title to assets using the exact wording: “Sam and Sue (plus any number of others), as “joint tenants, with right of survivorship.” At the first tenant’s death, the asset passes proportionately to the survivor(s).

Tenancy in Common. Owner takes title in joint names, “Sam and Sue,” either as “tenants in common” or simply “as joint owners.” Any number of owners can hold property as tenants in common. At a tenant’s death, only the deceased tenant’s interest is probated to determine how it will be transferred. The other co-tenants continue to own their respective shares, unaffected by the death.

Payable on Death Accounts (POD). Statutorily created financial accounts, often called Transfer on Death (TOD) or In Trust for (ITF) accounts. Owners create and own the account while they’re alive, and at their death(s), the remaining funds pass to named “beneficiary” (ies).

Beneficiary designations for life insurance and retirement accounts. Both life insurance proceeds and retirement accounts pass directly to the named beneficiary.

Community property title. In California, a husband and wife may take title to their assets “as community property,” for example, “Sam and Sue, as community property,” and upon either death, the survivor simply petitions the probate court to confirm that he or she should inherit 100 percent of the property.

Deeds of gift. Owners may use a “gift deed” to convey real property intended to vest later. Such a transfer requires careful wording such as, “Sam conveys to Sue for her life, and then to Jim.” This means Sam gifts a “life estate,” the right to use the property for life to Sue and, when she dies, title passes to Jim. Recording the deed secures the title change.

CUTMA. This stands for “Custodian Under the Uniform Transfer to Minors Act.” Using exact words: “as custodian for (minor’s name), under the California Uniform Transfers to Minors Act” in the transfer document, a donor may gift property to a minor (under 18) without a trust or court intervention. The custodian has a fiduciary duty to hold and use the property solely for the child, until the child is 18.

Unlimited values may be gifted at little cost both at setup and final transfer after a death. These techniques, however, only effectuate transfers. When a donor solely relies on them, the donor relinquishes all control over surrounding gift details and circumstances—often with unanticipated, unintended, unfortunate results.

Consider these questions:

What if the donee predeceases: Who inherits?

What if the donee is incompetent or unable to manage money? No alternatives, conditions or safeguards can be included in a simple nonprobate transfer.

What if the transfer tax laws change and the transfer becomes taxable—the donee will be charged with transfer tax.

What if the beneficiary of the CUTMA account, at age 18, is financially immature, irresponsible or addicted to an unhealthy lifestyle?  

The donee may face having to pay the donor’s creditors, who have rights under the fraudulent conveyance laws to trace assets to satisfy a debt. Alternatively, the asset may be snatched by the donee’s creditors on receipt.

Beneficiary designations on life insurance and retirement accounts appear seductively simple, but are complex and require periodic updating. What if an ex-spouse, deceased parent or minor remains as the named beneficiary? Have the “stretch-out” advantages of keeping a tax advantaged account intact after death been anticipated and protected? Have the tricky income tax consequences of choosing retirement account beneficiaries been evaluated?

If an entire estate is disposed of using one or more of these separate techniques, how will creditors be paid? Beneficiaries like to take the asset and run—and sorting out statutory priorities to pay the decedent’s obligations may be time-consuming and expensive.

Not surprisingly, joint tenancy and tenancies in common are often troublesome.     Key traps are: The creator may wish the joint party to be added to the account for convenience or emergency purposes—without intending or understanding the co-owner becomes an immediate owner, with legal rights to use any or all of the account; the creator may forget naming one child as joint tenant on an account while intending that all the children equally share the whole estate; in planning estate transfers, creators frequently overlook gifts of joint accounts and end-up leaving little to pass under a will; gift tax issues are raised; and joint accounts between spouses may result in a loss of a step-up in basis to the survivor.

Since a will or trust doesn’t affect or supersede any of the techniques mentioned here (except a tenancy in common account), they may end up alone controlling the estate, whether or not they are consistent with the intended plan, as expressed in the will or trust.

As an attorney, I’ve euphemistically “enjoyed” lots of business unraveling, contesting or defending these strategies—situations where the client would have saved more by using a well-drafted will or trust. That said, each can be an efficient tool if strategically employed.


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