Louis N. Teti, LL.M.

Our June newsletter included my article entitled the "Top 16" List of Common Misconceptions in Estate Planning. Here is a further analysis of Misconceptions #12 and #11.

Misconception #12:
"We own everything jointly as husband and wife, so there is no need to worry about a Will until one of us dies."
Estate planning involves an extensive review of all of your assets, not only to determine the current value of those assets, but also how the assets are titled. Title to an asset can defeat a person's intentions as stated in their Will. For example, if an asset is owned jointly between a husband and wife as "tenants by the entireties", this means that upon the first spouse's death the asset passes automatically, by operation of law, to the surviving spouse. That asset does not pass through the deceased spouse's Will, even if the Will gives the deceased spouse's estate to someone other than the surviving spouse.

In smaller estates, where there are no significant Federal Estate Tax issues, holding assets as husband and wife is sometimes advisable if the clients want the surviving spouse to own everything at the first spouse's death and, more importantly, to enable the surviving spouse to control the ultimate disposition of the asset. However, in cases where the estate will be subject to the Federal Estate Tax, holding assets jointly is not always advisable, and is frequently ill-advised. In order to maximize Federal Estate Tax savings, each spouse needs to create his or her own individual estate so as to protect up to $2 million (the current Federal Estate Tax exemption), thus protecting a total of $4 million as opposed to a single $2 million exemption. Holding everything jointly will not enable the married couple to accomplish this goal.

There are other forms of joint ownership, including joint tenants with the right of survivorship (between persons other than spouses) and tenants in common. Survivorship assets automatically pass to the surviving joint tenant. If an asset is held by two or more persons as "tenants in common", then each person's portion of the jointly-held asset will pass in accordance with the provisions of that person's Will at his or her death, and not necessarily to the surviving joint tenant.

Again, when you are do your estate planning, it is critical to examine the manner in which you own assets. Joint ownership is not always the answer.

Misconception #11:
"We have a lot of life insurance, but since insurance is not taxable, there is no need to worry about doing any tax planning for that particular asset."
Wrong! Although life insurance proceeds are not taxable to the recipient for income tax purposes, those proceeds are included in the taxable estate of the owner of the policy for Federal Estate Tax purposes. There are ways to avoid this significant Federal Estate Tax problem, by placing the ownership of the policy in the name of a person or entity other than the insured.

Life insurance proceeds are not taxable for Pennsylvania Inheritance Tax purposes. However, in estates of over $2 million, the addition of life insurance proceeds to the taxable estate for Federal Estate Tax purposes can cause as much as 45% of the insurance proceeds to be paid to the Internal Revenue Service, unless proper irrevocable trust tax planning is implemented. Irrevocable trusts involve careful planning techniques, careful completion of the life insurance application and beneficiary designation, payment of the premiums by the Trustee (not the insured), and notification of the trust beneficiaries of their right to withdraw their share of any gifts that the insured may make to the trust to pay the insurance premiums. Again, all tricky details which require careful and professional attention.

Regardless of any death tax issues relating to life insurance, you should always be aware of how the beneficiary designations on your life insurance policies are arranged. Have you named a contingent beneficiary, who would take in the event the primary beneficiary is deceased? Don't assume that you know whom you have named as beneficiaries on your life insurance! Review these designations periodically, and update them from time to time to be sure that your current intentions are accurately reflected.

MacElree Harvey
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West Chester, PA 19381–0660
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