In my last article, I covered some of the common pitfalls of attempting to avoid probate by, primarily, placing property in joint tenancy. I’ve saved the biggest zingers for this article.
One of the major problems with this method of avoiding probate is the lack of creditor protection. Although generally clients who wish to put their home or bank account in joint tenancy have a sense that their son or daughter is “good with money,” “responsible,” and “has a good head on their shoulders,” creditor protection should still be a primary concern. For one thing, sometimes clients are incorrect about the status of their children’s finances. Perhaps the child is deeply in debt but too embarrassed to say anything about it. Perhaps the child has tax debt, which can cause the IRS or Franchise Tax Board (FTB) to levy your account. Any number of potential creditor claims could put your finances at risk.
But things happen. No one needs a reminder that we are in a tough economic downturn. People are losing their houses and going bankrupt all over the country all the time. Although I hope you and your family are riding through this economic storm relatively unscathed, you should plan for the possibility that that might not be the case. There are many financially responsible people who have found themselves with a house under water and without a job. If your child goes bankrupt, his “assets” must all be listed on the court papers, which includes his joint tenancy assets. But assets in your trust of which he is in charge (i.e. the trustee) are not included in his bankruptcy. Furthermore, your child could get involved in a car accident or lawsuit of some variety in which damages are payable to the other party. If that happens, guess what? YOUR bank account, brokerage account, and other assets are subject to that judgment. Properly planning in advance for these possibilities will ensure that your child is doing what you intended: helping you manage your finances in your old age and inheriting the funds.
Finally, placing property in joint tenancy is helpful to avoid probate, which by definition happens after your passing. However, there are always things that may happen during your life that will null the benefits of joint tenancy. For example, you could become ill and require expensive skilled nursing. Although you may be able to qualify for Medi-Cal or VA Aid & Attendance non service connected disability pension benefits, you generally must spend down your assets before you can qualify. Instead, with proper planning, which may include a QVap or QMap Trust, you could qualify for these healthcare benefits without depriving your family of any inheritance. Additionally, you could become incapacitated and require someone to make financial decisions on your behalf. Many of these types of decisions are difficult enough when those closest to you are aware of your preferences. If you never notify them of your preferences you could risk any number of adverse consequences.
There is a happy medium between the very low cost of simply changing assets into joint tenancy and the high cost of probate. To find out how to strike the balance you need for your family and circumstances, you should consult a competent attorney.
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