The Devils is in the Details: How the Legal Title of Assets can Sabotage One’s Inter Vivos and Testamentary Estate Plans
By: Anthony J. Enea, Esq.*
If I had a dollar for every time a client believed that upon his or her death their Last Will and Testament would control the disposition of jointly held assets, or that their Revocable Living Trust would control assets that were not legally titled in the name of the Trust, I probably would not have spent a sunny Spring weekend writing this article. I am not exactly sure when it occurred, however, during the last several centuries it has become very common for married couples and seniors to title many of their assets jointly with their spouses, and if one was not married, jointly with their children or other loved ones. Perhaps it is believed that doing so was evidence of the strength of their marriage or of the depth of their love for one another.
All frivolity aside, there are many logical and legitimate reasons for real and personal property to be jointly titled or to have accounts titled “in trust for” or “transfer on death.” For example, the jointly held real and/or personal property may have been purchased or created with assets the parties equally contributed, or in the case of married couples, they may be assets purchased during the marriage. With respect to jointly held bank accounts, said accounts allow the account holders to have full and unfettered access to the accounts during their lifetime. This is of particular advantage upon the death, disability or incapacity of the joint account holder. Jointly held real and personal assets are also commonly recognized as effective wealth transfer vehicles which permit the transfer of assets from one party to another upon death without necessitating the probate of a Last Will or the creation of a Trust. However, significant problems arise when clients and, unfortunately, some attorneys do not recognize and fully understand the unintended consequences of assets passing by “operation of law” and the estate, gift and income tax consequences resulting from real and personal property being jointly titled or titled in a manner that the property passes by operation of law. In this article I will highlight the significant pitfalls resulting from how the legal title of real and personal property is held, while also providing you with the statutory guidance with respect thereto.
Common Law Rules of Ownership of Property and their Codification
The joint ownership of both real and personal property has been recognized for centuries as a valid legal doctrine. At common law three (3) forms of joint ownership were recognized:
(a) tenancy in common (individuals own an indivisible fractional share with no right of survivorship in the other joint tenants interest;
(b) tenancy by the entirety (applicable to husbands and wives and ownership of real property only each own undivided interests with a right of survivorship but without the right to unilaterally sever or partition their interests); and
(c) joint tenancy (the joint tenants have an undivided interest which can be unilaterally severed or destroyed, the tenants have a right of survivorship).
These three (3) common law forms of ownership have been codified and recognized in Section 6-2.2 of the New York Estates, Powers and Trusts Law (EPTL).1 With respect to the authorization of conveyances of an interest in real property by one or more persons, the relevant statutory provisions are found in Section 240-b of the New York Real Property Law (RPL).2 As to the severance of an interest(s) in jointly held real property the relevant statutory authority is found in Section 240-c of the New York Real Property Law.3
Relevant Statutory Provisions for Jointly Titled Bank and Brokerage Accounts
It is important to note that the right to receive by operation of law the assets in a joint account upon the death of the joint tenant does not apply to a joint account that is created and held “for the convenience” of the depositor. Accounts “for the convenience” are regulated by 678 of the New York Banking Law.4 678 provides that accounts held “for the convenience” shall not affect the title to such deposit or shares. The depositor is not considered to have made a gift of one-half the deposit or of any additions or accruals thereon to the other person, and on the death of the depositor, the other person shall have no right of survivorship in the account.5
In order for the provision of 678 of the Banking Law to apply, the words “for the convenience” or similarly “for convenience only” must appear on the title of the account.6 If the aforesaid words do not appear, the presumptions created by 675 of the Banking Law will be applied. 7
675 of the Banking Law provides that the making of a deposit in the name of the depositor and another to be paid to either or to the survivor is prima facie evidence that the depositor intended to create a joint tenancy, and that where such a deposit is made, the burden of proof is on the one challenging the presumption of joint tenancy. Under 675 three (3) rebuttable presumptions are created: (i) as long as both joint tenants are living, each has a present unconditional property interest in an undivided one-half of the money deposited; (ii) that there has been a irrevocable gift of one-half of the funds in the account by the depositor to the other joint tenant; and (iii) that the joint tenant has a right of survivorship in said entire joint account upon the death of the other joint tenant.8
675(b) of the Banking Law provides that the burden of proof is upon the one challenging the presumption of joint tenancy.9
With respect to securities’ accounts or brokerage accounts in joint names, the Transfer on Death Security Registration Act and EPTL 13-4.1 through 13-4.12 permits joint securities and brokerage account holders to have the rights and choices that joint bank account holders have.10 The Transfer-on-Death Security Registration Act was enacted on July 26, 2005 and it amended EPTL by enacting a new part four (4) to Article 13. It is essentially codified in EPTL 13-4.1 through 13-4.12.11 Under EPTL 13-4.2 a “transfer on death” or “payable on death” securities or brokerage account can only be established by sole owners or multiple owners having a right of survivorship in the account. The owners of a securities or brokerage account held as tenants-in-common are expressly prohibited from creating a “transfer on death” account. Although the creation of a “transfer on death” or “payable on death” securities or brokerage account does not require that any specific language be utilized to create the account, but evidence of its creation is the usage of the phrases “transfer on death” and “payable on death” or their abbreviations “TOD” or “POD”.12 (EPTL 13-4.5) However, under EPTL 13-4.4, evidence of the establishment of the account is the opening documentation that indicates that the beneficiary is to take ownership at the death of the other owner(s).13
The Pitfalls of Jointly Titled, “In Trust For” or other Property Passing by Operation of Law
The manner in which one holds title to property at the time of his or her demise will have a critical and significant impact upon his or her estate plan and the disposition of his or her assets. With the exception of property (real and/or personal) held jointly as tenants in common, all other jointly held property, “in trust for” accounts, “transfer on death” accounts, IRA’s, 401(k)’s and life insurance policies which have a named beneficiary (other than one’s estate) are accounts that by operation of law and are non probate assets. Thus, they are assets that are not controlled by one’s Last Will and Testament. While for many individuals (those with relatively small estates), jointly titled property or having property passing by operation of law may be advisable. However, for many other it can have disastrous and unforeseen consequences. The most expertly crafted Wills, Trusts and other documents of a testamentary nature may be rendered useless by the legal title of one’s assets. The following is a summary of how many plans are sabotaged and the unintended consequences resulting from jointly held assets:
A. Property Jointly Titled and/or Passing by Operation of Law to One’s Spouse
1. Estate Tax Impact – Property jointly held with one’s spouse or which names one’s spouse as a beneficiary with the exception of property held with a spouse as a tenant in common, will pass by operation of law to said spouse. Thus, it is property eligible for the “unlimited marital deduction” on the death of the first to die and will pass free of any estate taxes to the surviving spouse who is a U. S. citizen.14 However, on the death of the second to die all of the surviving spouse’s assets, including those received by the first to die, will be includible and taxable in his or her estate. Pursuant to the provisions of the recently enacted “Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010,” also known as “TRA 2010” the surviving spouse, upon his or her death, would have only a Five Million ($5,000,000) Dollar federal estate tax credit available upon his or her demise during the years 2011 and 2012, with a 35% estate tax upon all amounts in excess of 5 Million Dollars.15
Thus, for example, a husband and wife with a 10 Million Dollar gross estate would like the ability to shelter $5,000,000 from federal estate taxes if their assets were jointly held or passed by operation of law from one spouse to the other upon the death of the first to die. This would occur even if the husband and wife had well crafted Last Wills or Inter Vivos Trust agreements that contained “Credit Shelter” or “Disclaimer Trust” provisions. Said Last Wills and/or Trusts would be of no import upon the jointly titled or other assets passing by operation of law. Similarly, for New York estate tax purposes, the One Million ($1,000,000) Dollar estate tax credit of the first spouse to die would also be squandered with respect to the jointly held and/or other property passing by operation of law to the surviving spouse, thus, also resulting in the potential for New York estate taxes upon the death of the second spouse to die.16
2. Impact upon the Children of a Prior Marriage –
As the rate of divorce has skyrocketed, more often than not the decision of the remarried parent to title his or her assets jointly with or to pass by operation of law to the new spouse can have devastating consequences upon the children of a prior marriage. It is not unusual to see clients in a second marriage to have assets titled jointly with or having their new spouse as a beneficiary. This is particularly common with respect to their IRA’s, 401(k), and other retirement assets. Most often they have been advised by their financial advisor that naming their spouse will continue the income tax deferral upon their death as the surviving spouse will be able to do an IRA rollover. Again, these IRA, 401(k) and other retirement assets will pass to the decedent’s spouse irrespective of any provisions for the children of the prior marriage in any Last Will or Trust.
B. Property held Jointly with Children and/or others
1. Potential Exposure to the Claims of the Creditors of Joint Owners – As parents age, it is not unusual for them to title assets jointly with one or more children. Often, the child selected is the one who lives closest to the parent and/or provides assistance to the parent with his or her financial affairs (payment of bills, etc.) One unintended consequence of doing so is that parent has now exposed his or her assets to the claims of the potential creditors of the child. It is not unusual for the jointly held asset to become embroiled in either a bankruptcy, divorce or other litigation involving the child.
2. Potential Gift and Estate Tax Consequences – When one transfers an interest in any real or personal property to a child or any non-spouse third party, he or she may have made a taxable gift that requires the filing of a federal gift tax return (if more than $13,000 per person in any calendar year) and which can result in utilization of part or all of one’s lifetime gift and estate tax credit (5 Million Dollars unified gift and estate tax credit for the years 2011 and 2012).17 The reduction of one’s lifetime gift and estate credit as a result of gifts made may result in a significantly smaller credit being available to the other heirs of one’s estate.
3. Potential Disinheritance of Other Children – If a parent places one child’s name jointly on his or her assets or accounts because the child is the “responsible” child that he or she trusts to in the famous words of Spike Lee… “Do the Right Thing,” the parent’s wishes that his or her assets be equally divided among his or her children may never be fulfilled, irrespective of the parent’s stated wishes in a Last Will or Trust. Unless the joint account is a “for convenience only” account under 678 of the Banking Law, the child is under no legal obligations to share the joint account with his or her siblings upon the death of the parent(s).18 Additionally, if the child upon the parent(s) demise does decide to do the right thing and share the joint assets with siblings, he or she may be subjected to gift tax consequence. The Surrogate Court’s dockets are filled with cases involving disputes as to whether or not the jointly held assets with a child should be part of the parent’s estate.
4. Potential Capital Gains Tax Consequences – A serious and often adverse consequence created by the transfer of real and/or personal property is the capital gains tax consequence upon the eventual sale of the jointly held property by the surviving joint tenant.19
When a parent re-titles his or her residence (or other real property) and other assets (securities) into joint title with a child, the child, unless the parent has reserved a life estate in the premises or the right to income from the asset transferred, will receive his or her interest in the asset transferred at the parent’s original “cost basis” in the property (purchase price plus any capital improvements). Thus, upon the death of the parent, the surviving joint owner’s cost basis in the property is the parent’s original cost basis. He or she will not receive a stepped up cost basis (date of death value) of the property.20
Failure to Fund Irrevocable or Revocable Trusts
One of the most common problems associated with the creation of Trusts is the failure of the client to comprehend that the Trust (Revocable and/or Irrevocable) will be of no consequence if the client and/or his or her attorney has not funded the Trust with the client’s assets. The Trust agreement is an agreement of a contractual nature which only controls assets that have been conveyed (titled) in the name of the Trust during one’s life or upon the one’s demise. A Trust can be the named beneficiary which receives specified assets upon one’s demise or the occurrence of a specified event. For example, a Trust can be the beneficiary of one’s account(s), IRA, 401(k), life insurance, etc.
Most recently I had a consultation with clients who presented to me a very large leather bound binder that contained their Revocable Living Trusts and Last Wills. Unfortunately and to the client’s dismay, neither their home nor any of their assets had been titled in the name of the Trust. All of their assets were jointly owned or named each other as beneficiaries. Thus, their very expensive Trust and Last Wills had no control over their assets.
When preparing Last Wills and Trusts for clients it is important that the clients are made to understand which assets will be controlled by the terms of their Last Wills and/or Trusts and all of the consequences resulting from their ownership of jointly held property and/or property that will pass by operation of law upon their demise. Additionally, the attorney should document for the client which assets, if any, the attorney will be responsible for the changing of title of and that which will be the responsibility of the client. The failure to do so can have serious consequences.
Anthony J. Enea, Esq. is a member of the firm of Enea, Scanlan & Sirignano, LLP of White Plains, New York. His office is centrally located in White Plains and he has a home office in Somers, New York.
Mr. Enea is the Chair-Elect of the Elder Law Section of the New York State Bar Association.
Mr. Enea is the Immediate Past President and a founding member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). He is also a member of the Council of Advanced Practitioners of NAELA.
Mr. Enea is the former Editor-in-Chief of the Elder Law Attorney, a quarterly publication of the Elder Law Section of the New York State Bar Association.
Mr. Enea is a Past President of the Westchester County Bar Association.
1 6-2.2 of the Estates, Powers & Trusts Law (EPTL)
2 240-b of the Real Property Law (RPL)
3 240-c of RPL
4 678 of the Banking Law
7 675 of the Banking Law
9 675 of the Banking Law
10 13-4.1 – 13.4.12 of EPTL
12 13-4.2 EPTL
13 13-4.4 EPTL
15 302(a)(1) of TRA 2010
16 952 of the New York Tax Law
17TRA 2010 Sections 301(b), (302)(b)(1) and 2505(a)(1)
18 678 of the Banking Law
19 1222 of the Internal Revenue Code
20 1014 of the Internal Revenue Code