The Joint Ownership of Property and Life Insurance
Many people believe that by owning property jointly with a trusted loved one they will be protected from, and will be able to avoid the need for their survivors to administer their estate through the court system while at the same time save their estate from having to pay attorney’s fees and taxes. This is not necessarily true.
Even if we assume for the moment that the joint owner of your property will survive you, unless the property is jointly held by you and your spouse, the tax authorities will treat the property for tax purposes as owned entirely by your estate unless your representatives can prove otherwise. Therefore, depending upon the value of your other assets, your estate may have to pay taxes on the entire value of the jointly held property. Finding old records showing who and how much was paid for the property many years ago is usually difficult.
Further, even if jointly owned property is held by a married couple, there can be problems if the couple files for divorce, or if there are marital problems which cause difficulty with the management of the property.
Often times a better way of holding property is to place your property in a trust so that the administration is governed outside of your estate. There are many types of trusts available and so it is best to talk with your lawyer before deciding on whether this option is best for you. For example, if you own a small business corporation your ownership interest may be subject to special rules which would prevent a trust from holding your stock. If you believe you have this issue, then you should see a tax lawyer who specializes in tax issues like small business stock, before deciding on whether a trust is best for you.
Finally, unless your will provides to the contrary, estate taxes are paid by the beneficiaries of life insurance policies. Depending upon your desires, you may want to add a provision to your will that specifies who pays all taxes, including taxes on life insurance. Better still, when you talk with your tax lawyer ask him or her about setting up a “Irrevocable Life Insurance Trust” which should help you save taxes.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Mark A. Krohn, L.L.M Taxation, CPA and a partner at J&G, is in charge of the Business Law Team and is also a member of the Trust & Estates Team. He can be reached by phone at our Walden, NY office at 866-303-9595 toll free or 845-764-9656 and by email.[/column_1] [/column]