Assets that pass by operation of law, such as jointly owned assets and assets that name a beneficiary, are not governed by the terms of your Will or trust. Instead, they pass automatically at your death, and as a result can have unintended results. For example, if your Will and trust reflect your wish that your entire estate be distributed to your three children equally, your assets will nonetheless pass to a single child added as co-owner on a bank or brokerage account, merely as a matter of convenience.

A great many married couples own some or all of their assets jointly. At death, the couple’s assets automatically pass to the surviving spouse. Although the automatic transfer may have seemed smooth and painless at the time, couples with a net worth in excess of Applicable Exclusion Amount ($1,000,000 in 2002) have permanently lost a significant tax planning opportunity. Had both spouses prepared revocable trusts and transferred one-half of their assets to each trust, the couple could have doubled the amount they can leave to their children free from federal estate tax.

A couple whose combined net worth is likely to remain below the Applicable Exclusion Amount, should consider adopting a “joint trust.” A joint trust combines the benefits of joint ownership with those of a trust. Both spouses are the grantors and trustee of the joint trust. On the death of the first spouse, the surviving spouse is in complete control of the trust and even retains the power to amend the trust.

Since the trust does not become irrevocable on the first spouse’s death, none of the trust administration discussed in Chapter Seven is required at the first spouse’s death. Probate is avoided on the death of both spouses. Unlike joint ownership, joint trusts (like other revocable trusts) can hold assets for the benefit of children beyond the age of 18.

If your late spouse did not have a trust, and you are now the sole owner of your marital assets, you should avoid the temptation of adding your children’s names to your accounts. Although jointly held assets pass to the surviving tenants by operation of law, and therefore avoid probate, there are a number of reasons not to use joint ownership as a form of estate planning.

First, joint ownership accords significant lifetime rights to the new joint tenants, and exposes your assets to the claims of their creditors. For example, if you add your children as joint tenants on your home, you cannot sell or mortgage your home without their consent. Even if the children consent to the mortgage or sale of the home, they would technically be entitled to their share of the proceeds from the sale, a result you certainly did not intend.

Your children’s creditors will lick their chops when they learn that your children have an ownership interest in your assets. In the event one of your children divorces, a son-in-law or daughter-in-law may claim a spousal interest in your home.

You cannot provide for contingent beneficiaries through joint ownership. For example, parents often wish to leave their assets to their children equally, with the share of a deceased child passing to his or her children (i.e. grandchildren). This objective cannot be achieved by titling assets jointly.

Under joint ownership, only the surviving named beneficiaries inherit, leaving the children of deceased children out in the cold. The share of a child who predeceases you will be allocated only to your surviving children.

In short, don’t gamble on joint ownership and other operation of law transfers. The best way to minimize estate tax, retain control of assets, insulate assets from children’s creditors, and ensure that assets pass to the intended beneficiaries, is to re-title assets into the name of your revocable trust.