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Jointly-Held Assets in Massachusetts: The Good, the Bad and the Ugly

March 30, 2010

Adding someone’s name to an asset of yours can be done all too easily, without your realizing all of the ramifications. There are many issues that come into play when deciding whether making an asset jointly-held is the right move. Among those issues are the common issues raised in any estate plan: creditor protection; family harmony; probate avoidance; estate, gift and capital gains taxation; and long-term care and governmental benefits (especially Medicaid, currently known in the Commonwealth of Massachusetts as MassHealth). Some of the ramifications of jointly-held assets are good, some are bad, and others are downright ugly.

The Good

— Jointly-held property is inherited by the surviving joint tenant(s), and thereby avoids the need for that asset to go through the probate process. (Probate, however, is often blown way out of proportion as a legal issue, often by those who stand to gain from selling an alternative, such as a revocable “living” trust or an annuity.)

— Any joint holder can write checks on a jointly-held bank account, even after the death or disability of one of them.

— Tenancy by the entirety (which is a special type of joint ownership available only to a married couple) can protect the home against the creditors of one spouse.

— A surviving joint tenant who had provided no financial contribution on assets that had appreciated in value often ends up with a new adjusted basis for capital gains tax and depreciation purposes.

— While estate tax and capital gains tax laws usually presume that a married couple each owned one-half of a jointly-held asset, the holding of the Gallenstein Tax Court case (and several cases which have followed it) can be used to justify avoidance of capital gains taxes for many surviving spouses, especially those who were not the primary breadwinners of the household.

— Assets other than bank accounts that are held in joint names can sometimes be considered inaccessible by Medicaid, and therefore not subject to the spenddown process. This possible exception does not apply if the joint owners of the asset are married.

— Under recent changes in Internal Revenue regulations, a surviving owner of an asset held in joint names or as tenants by the entirety can now execute a qualified disclaimer within nine (9) months of the decedent’s death, and thereby refuse to accept the one-half interest of the deceased spouse, but unfortunately the Massachusetts disclaimer statute may prevent full use of this opportunity. By taking no steps to accept the survivorship interest and executing a disclaimer, the surviving owner has at least some opportunity to do estate tax planning in a situation where proper advance planning was not done.

The Bad

— Jointly-held assets are inherited directly by the surviving joint tenant, yet a Will usually does not take those jointly-held assets into account when the total inheritance is divided into shares. For this reason, inheritances are often skewed toward surviving joint tenants, who inherit more than they would have if the jointly-held asset had passed through the probate process.

— On many bank accounts, each joint holder has the power to withdraw everything from the account. Thus, the accounts could be cleaned out without notice to the person who originally placed all the funds into the accounts.

— The incapacity of one person can cause a jointly-held asset to be frozen, resulting in the need for guardianship or conservatorship. The one exception is where an effective durable power of attorney exists.

— On the federal estate tax return for a decedent who owned assets in joint names with right of survivorship, the contribution of the parties must be traced. The only exception to this rule is a tenancy by the entirety or joint tenancy created after 1976 between spouses. The exception does not apply if either spouse is not a U.S. citizen, or if the jointly-held asset contains a third name.

— Jointly-held assets are exposed to lawsuits by creditors and divorcing spouses of each joint tenant.

— A decedent’s will is ineffective to control the ultimate disposition of jointly-held assets. The surviving owner can ignore the decedent’s wishes in the absence of a specific provision in a prenuptial agreement or will contract.

— Adding another name to a deed can negatively impact your ability to sell your home and pay no capital gains taxes on the first $250,000 (or $500,000 for married couples) of appreciation. The only persons eligible for this exclusion are those who owned the home and lived in it for two (2) of the five (5) years prior to the sale.

— By itself, adding a name to an asset often does not protect the asset from being considered countable by Medicaid, especially in the case of bank accounts. Thus, jointly-held assets often are considered available by Medicaid to pay for nursing home care, unless the healthy joint tenant can establish that the asset is inaccessible or did not belong to the Medicaid applicant.

— Spouses who have children from prior marriages and hold their assets in joint names run the risk that the surviving spouse will inherit everything, then disinherit the children of the first spouse to die. (If a prenuptial agreement or will contract had been executed, however, that risk would have been eliminated or at least minimized.)

— One of the most argued-about and litigated issues after someone’s death involves whether a bank account was held in joint names with someone else for purposes of convenience or for purposes of inheritance.

The Ugly

A married couple that owns everything in joint names can end up causing their heirs to pay more Massachusetts estate taxes than necessary. Under the law in effect in 2010, the sum of $1,000,000 can be given or left to your heirs free of Massachusetts estate and gift taxation. A married couple can give or leave to their heirs double that amount, for a total of $2,000,000. If the surviving spouse ends up with everything, however, the $1,000,000 exemption of the deceased spouse ends up being wasted (unless a qualified disclaimer is executed within 9 months of the death of the first spouse).

Uglier yet, if the IRS turns the tables on taxpayers and begins to use the Gallenstein case’s reasoning to its advantage, then some surviving spouses could end up with severe problems with capital gains taxes when selling appreciated assets.

For these reasons, a married couple with a net worth in excess of $1,000,000.00 (including life insurance that is not owned by an irrevocable trust) should often divide their jointly-held assets and establish “credit shelter” trusts, also known as “bypass” trusts. It is possible for the surviving spouse to be in charge of the trust, and to be able to dip into the trust for the spouse’s own health, education, maintenance and support, as well as to be able to make payments to or for others.

Further, there may be a good reason not to use the trust to avoid probate. If the credit shelter trust remains unfunded until death, it is possible that the trust can remain available to pay privately for the spouse’s home care or assisted living, yet be considered by MassHealth (i.e., Medicaid) regulations in Massachusetts to be considered an asset unavailable to pay for the surviving spouse’s nursing home costs.

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