A testamentary trust, created through a will, presents unique challenges when dealing with property held in joint tenancy with right of survivorship, as it often bypasses the trust altogether. This is because jointly owned property automatically transfers to the surviving owner(s) outside of probate, and thus, outside of the control dictated by the will establishing the testamentary trust. Understanding how this interaction unfolds is crucial for effective estate planning, especially in California where community property laws further complicate matters. Roughly 60% of Americans do not have a will, leaving the disposition of assets to state law, which may not align with their desired outcomes for beneficiaries, particularly when it comes to complex holdings like jointly owned property.
What happens to jointly owned assets if my will creates a trust?
When property is held in joint tenancy, the surviving joint tenant immediately inherits the deceased’s share, regardless of what the will—and therefore the testamentary trust—states. The trust only governs assets *owned solely* by the deceased at the time of death. For instance, if a married couple owns a home as joint tenants with right of survivorship, upon one spouse’s death, the surviving spouse automatically becomes the sole owner, and the testamentary trust outlined in the deceased spouse’s will has no claim over that property. This can disrupt the intended distribution of assets if the testator wished for that property to be managed within the trust for the benefit of specific beneficiaries. It’s a common misconception that a will covers *everything* you own; it only addresses assets not already designated with a beneficiary or held in a way that bypasses probate.
Can I direct jointly owned property into my trust?
Yes, but it requires proactive steps *before* death. Simply stating in your will that you want jointly owned property to be included in the testamentary trust is insufficient. The joint owner(s) must *sever* the joint tenancy, essentially converting it to tenancy in common, which *does* allow the deceased’s share to pass through the estate and potentially be governed by the trust. This is typically done by executing a deed transferring the ownership from joint tenants to tenants in common. A crucial point to consider is the potential tax implications of severing joint tenancy, such as triggering property reassessment under Proposition 13 in California. Approximately 30% of estate planning errors stem from failing to properly address jointly held property, according to a recent study by the American Academy of Estate Planning Attorneys.
I had a client, old Mr. Henderson, who learned this lesson the hard way…
Old Mr. Henderson and his daughter, Sarah, owned a small beach cottage jointly. He intended for the cottage to be held in trust after his death for the benefit of his grandchildren, to be used as a family vacation home. He meticulously drafted his will and established a testamentary trust, confident everything was in order. Unfortunately, he never severed the joint tenancy. When Mr. Henderson passed away, Sarah automatically inherited the cottage outright, bypassing the trust entirely. She had her own plans for the property and quickly sold it, much to the disappointment of the grandchildren. It was a heartbreaking situation, and a clear example of how failing to address jointly owned property can undermine even the most well-intentioned estate plan. He thought a will was enough, unaware of the power of joint tenancy to override his wishes.
How did a similar situation work out with the Miller family?
The Miller family faced a similar predicament. Mr. and Mrs. Miller owned a rental property jointly. They consulted with our firm years before Mr. Miller’s passing, and we advised them to sever the joint tenancy and create a living trust – a proactive step beyond a testamentary trust. By transferring the property into the living trust, they ensured it would be managed according to their wishes after their deaths, safeguarding their children’s financial future. When Mr. Miller passed, the property seamlessly transitioned into the trust, avoiding probate and providing a consistent income stream for his beneficiaries. It wasn’t just about avoiding probate fees, but about ensuring his vision for his family’s well-being was realized. They had the foresight to plan ahead, and it made all the difference in preserving their legacy. A solid plan provides peace of mind, knowing your loved ones will be taken care of.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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