Yes, jointly held assets pass from the deceased joint tenant to the surviving tenant by operation of law and therefore are not subject to probate.

Typical forms of joint tenancy include “joint tenants with rights of survivorship” (sometimes referred to as “JTWROS”), and, if between spouses, “tenancy by the entireties”. Other methods of transfer, like transfer on death (“TOD”) designations and beneficiary designations, also pass by operation of law and avoid probate.

Although jointly held property avoids probate, there are a number of reasons not to use joint ownership as a form of estate planning. TOD and beneficiary designations, on the other hand, can be essential estate planning tools if used properly.

JOINT TENANCY

Joint Tenancy No question, a great many married couples own some or all of their assets jointly. By operation of law, the couple’s jointly held assets pass entirely to the surviving spouse. Thus, transition at the time of the first spouse’s death is relatively easy for such couples. However, the Unified Credit Equivalent (or the “Applicable Exclusion Amount”) of the deceased spouse has been permanently lost. For couples with estates in excess of the Unified Credit Equivalent ($650,000 in 1999), it is critical that all joint tenancies be severed to permit assets to be transferred (“funded”) to each spouse’s separate Revocable Living Trust. Spouses can be reluctant to dissolve their joint tenancies until they learn of the tremendous estate tax benefits in doing so.

There is an unavoidable loss of control that occurs when additional tenants (owners) are added to an asset. Adding tenants exposes the asset to the claims of the creditors of the new joint tenants. Joint ownership is not usually a problem between spouses. However adding children or other family members as co-owners after the death of a spouse can result in loss of control, liability exposure and inequitable bequests.

Even though intended as a convenient method of transferring assets at death, joint tenancies accord significant lifetime rights. For example, if mom adds her children as joint tenants on her home, she cannot sell or mortgage her home without the consent of her children. What’s worse, if she has boys, their wives obtain a dower interest in mom’s home and must therefore consent to any sale or mortgage as well. 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 mom certainly didn’t intend. Further, in the event of divorce of one of the children, a son-in-law or daughter-in-law may claim a spousal interest in the home.

There is no guarantee that the intended beneficiary will actually receive the jointly held asset. Typically, parents wish to leave their assets equally to their children, with the share of a deceased child passing to the children of such predeceased child. This objective cannot be achieved by titling assets jointly. Under joint ownership, only the surviving named beneficiaries have ownership. Thus, if mom adds her three children as joint tenants on her home and bank accounts, and one her children predeceases her, only the two surviving children inherit, leaving the children of the deceased child out in the cold.

TRANSFER ON DEATH

In late 1996, Michigan joined the vast majority of states in adopting the Uniform Transfer-on-Death Security Registration Act.

Prior to passage of the Act, securities such as stocks, bonds and mutual funds, would not allow for the designation of a beneficiary. The legislation enables individual or joint account owners to name beneficiaries to receive their securities upon their death rather than through a probated distribution.

To be registered in beneficiary form, the account must use the designation “pay on death” (“POD”) or “transfer on death” (“TOD”). If there are multiple account owners, the beneficiary receives the assets only after the last account owner dies.

During the lifetime of the account owner(s), the beneficiaries have no interest in or control over the account and may not be given information regarding the account without authorization from the account owner(s).

Registration of a security in beneficiary form may be cancelled or changed at any time by the owner or owners without the consent of the beneficiary.

The TOD designation can name multiple beneficiaries, contingent beneficiaries and substitute beneficiaries, such as the grandchildren of a child who predeceases the owner. A trust is also a permissible beneficiary.

UNIFORM GIFTS TO MINORS ACT (UGMA) ACCOUNTS

The Michigan Uniform Transfers to Minors Act ("UTMA") permits a custodial account (bank account, mutual fund account, etc.) to be set up for the benefit of a minor.

Any adult who is interested in the minor's financial future can establish an UTMA account and manage it as the account custodian. Account assets may be used for the minor's benefit as the custodian sees fit, including private school tuition or a new car. In general, account assets cannot be used to substitute for necessities for which parents are responsible, such as food, clothing and shelter.

Since the minor is considered the owner of the UTMA account, all of the unearned income generated by the asset is taxed to the minor. For 2002, the first $750 of a minor's unearned income is income tax free. The next $750 is taxed at the minor's lower rate. Any unearned income above $1,500 is taxed
at the parents' highest rate, if the minor is under age 14.

UTMA accounts have a number of drawbacks that, on balance, dictate against their use. It must be remembered that the custodian of an UTMA account must turn the assets of the account over to the minor no later than when the minor turns twenty-one (21). At that point, the minor can do with the assets as he or she pleases. Assets set aside for college may instead fund a sports car or a year on a tropical beach. An UTMA account may also adversely affect a child's ability to qualify for college financial aid. Finally, the UTMA account will be included in the estate of the gifting parent if the parent also acts as the custodian on the account.

Gifts made under the predecessor Uniform Gifts to Minors Act ("UGMA") - which was repealed and replaced in 1999 by UTMA - are now governed by the new UTMA rules, except that old UGMA gifts must be turned over to the minor at age eighteen (18) as required under UGMA. Despite the improvements made to UGMA by UTMA, such gifts have fallen out of favor. Now, Section 529 Plans
are the preferred method of gifting to children.

SECTION 529 PLANS

Section 529 plans - named after the section of the Internal Revenue Code from which they derive - are tax-favored educational savings plans.

Contributions are not income tax deductible, but do qualify for the gift tax annual exclusion ($11,000 in 2002-2003). They can be pre-funded by contributing up to five years worth of gifts ($55,000) in one year.

Earnings on contributions are not subject to income tax while in the plan, and are completely forgiven if the withdrawals are used for qualified educational expenses. The original contributor can make withdrawals for his or her own use, but such withdrawals are not considered to be qualified and therefore are subject to income tax and penalties.

Although established for a particular beneficiary, the sponsor can change beneficiaries - if, for example the original beneficiary decides not to go to college - without tax or penalty. A plan set up by a grandparent does not count as part of the student's resources for financial aid purposes, and unlike an UTMA, plan assets are not part of the contributor's taxable estate.

CONCLUSION

Without proper planning, the forms of joint ownership or designation discussed in this chapter can create unintended consequences at death. Assets passing by operation of law pass to the joint owner or named beneficiary immediately upon the death of the owner or joint tenant.

Although such transfers avoid probate and delay, the opportunity to save tax, plan for minor (or handicapped) children, second spouses, and natural children is permanently lost.

Assets passing by operation of law such as jointly owned assets, POD/TOD securities, assets that name a benificiary, and UTMA accounts, are not controlled by the decedent's Will or revocable trust.

Although mom's trust may direct that her entire estate be distributed to her three children equally, her assets may nonetheless pass to her daughter who lives nearby and whose name was added to mom's assets as a convenience to mom. The preferred approach 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 a revocable living trust, rather than gamble on joint ownership and operation of law transfers.