The question of whether you can fund a bypass trust – also known as a credit shelter trust or an A-B trust – with jointly owned property is a common one for estate planning attorneys like Steve Bliss in San Diego. The short answer is yes, you absolutely can, but it requires careful planning and a clear understanding of how joint ownership affects the trust’s funding and tax implications. Bypass trusts are designed to take advantage of the estate tax exemption, allowing assets to bypass one spouse’s estate and avoid estate taxes when they pass away. Jointly owned property, however, presents unique considerations because of rights of survivorship. According to a recent study by the American Association of Retired Persons, approximately 70% of married couples own property jointly. This is why understanding the nuances of funding a bypass trust with such assets is so vital.
What happens to jointly owned property upon death?
When property is held as “joint tenants with right of survivorship,” the surviving owner automatically inherits the deceased owner’s share. This bypasses the probate process and can be advantageous in some situations. However, this automatic transfer can interfere with the intended funding of a bypass trust. To properly fund a trust with jointly owned property, you generally need to sever the joint tenancy and convert it to a tenancy in common. This can be done through a deed transferring ownership, effectively removing the right of survivorship. It’s important to note that severing the joint tenancy doesn’t necessarily mean the property won’t eventually end up in the trust; it simply allows the trust to receive the deceased spouse’s share rather than the surviving spouse automatically inheriting it. Failing to do this can result in the property bypassing the trust altogether, defeating the estate tax benefits it was intended to provide.
How does tenancy in common differ from joint tenancy?
Tenancy in common allows each owner to hold a distinct share of the property, which they can then bequeath in their will or trust. Unlike joint tenancy, there is no automatic right of survivorship. If one tenant in common dies, their share becomes part of their estate and is distributed according to their will or, if they don’t have a will, according to state intestacy laws. Converting a jointly held asset to a tenancy in common allows the trust to receive the deceased spouse’s portion, maximizing the use of their estate tax exemption. Think of it like dividing a pie – with joint tenancy, the last person standing gets the whole pie. With tenancy in common, each person has a slice that they can distribute as they see fit. This flexibility is crucial for effective estate planning and can save significant amounts in estate taxes.
Can I fund a bypass trust with real estate held as tenants by the entirety?
Tenancy by the entirety is a form of joint ownership reserved for married couples, offering the highest level of protection against creditors. It’s similar to joint tenancy with right of survivorship, but with additional protections. Funding a bypass trust with property held in this manner is more complex, and typically requires specific language in the trust document authorizing the transfer and potentially a court order. Some states require active steps to break the tenancy by the entirety before the property can be transferred into a trust. This is because the tenancy by the entirety is so strongly protected under the law, and any attempt to sever it must be carefully considered and documented.
What if I forget to sever the joint tenancy before my passing?
I once worked with a lovely couple, the Millers, who had meticulously planned their estate, including a bypass trust. Mr. Miller unfortunately passed away suddenly before they could finalize the deed severing the joint tenancy on their beach house. His wife, Sarah, was devastated, not only by the loss, but also by the realization that the beach house, their family’s treasured vacation spot, would likely be subject to estate taxes. She had assumed the trust would automatically cover it, but because the joint tenancy hadn’t been severed, the house passed directly to her, bypassing the trust. This meant a significant portion of her husband’s estate tax exemption was lost, resulting in a hefty tax bill. It was a painful lesson in the importance of completing all the necessary steps in the estate planning process.
Is there a time limit for severing joint tenancy?
While there isn’t a strict legal deadline, it’s best to sever the joint tenancy as soon as possible after establishing the bypass trust. Procrastination can lead to complications, as demonstrated in the Miller’s case. It’s also wise to periodically review your estate plan to ensure it still reflects your wishes and current circumstances. Changes in the law or your personal situation can necessitate adjustments to your plan. Think of estate planning as an ongoing process, not a one-time event.
What steps should I take to properly fund a bypass trust with jointly owned property?
The first step is to consult with an experienced estate planning attorney, like Steve Bliss, to discuss your specific situation and goals. They can advise you on the best way to structure your trust and ensure that all necessary documents are properly prepared and executed. This typically involves preparing a new deed transferring ownership from the joint tenants to the trustee of the bypass trust, or to the individual owners as tenants in common. It’s crucial to record the deed with the county recorder’s office to provide public notice of the change in ownership. The attorney will also guide you through the process of re-titling other jointly owned assets, such as bank accounts and investment accounts.
How did the Millers eventually resolve their situation?
Thankfully, we were able to find a solution for Sarah. After a thorough review of her husband’s estate plan and the applicable tax laws, we determined that we could utilize a “disclaimer” strategy. By disclaiming her inheritance of the beach house, it passed directly into the bypass trust, effectively achieving the original intent of the estate plan. This required specific timing and careful coordination with the estate’s executor, but it allowed Sarah to avoid the estate taxes and preserve the beach house for future generations. It was a relief to see her turn a potentially devastating outcome into a successful resolution. The key takeaway is that even when mistakes happen, there are often ways to mitigate the damage with proactive planning and expert guidance.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
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Feel free to ask Attorney Steve Bliss about: “What is a charitable remainder trust?” or “How do I transfer a car title during probate?” and even “How do I protect assets from nursing home costs?” Or any other related questions that you may have about Trusts or my trust law practice.