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Law Offices of Ronald W. Rutz
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November 9, 1998: Life Insurance and Irrevocable Trusts

Q: If we hold assets in joint tenancy, will everything get tied up if one of us is incapacitated? We were told that this was a major reason to spend $2600 on a living trust.

A: In Colorado since each joint tenant is deemed an undivided owner of the asset, one joint tenant will be able to control and deal with his or her half of an asset even if the other co-owner is incapacitated. With assets such as stocks or CD's, normally there is little problem in accessing half of the asset. For assets such as a house, even though the legal theory is still valid, it is hard to effectively deal with real property without being able to convey the entire title. For assets such as checking accounts, the entire amount is available to anyone on the account. The easy answer to this theoretical problem and to 100% control by either joint tenant is just do a simple, inexpensive power of attorney. Even with a living trust, you should still have a power of attorney anyway.

Q: We read that assets held in joint tenancy would be disqualified for the federal estate tax exemption of $625,000.

A: Having property in joint tenancy will not disqualify the asset from tax sheltering under the uniform credit. In fact, assuming two people on a title, the deceased's estate would only have his or her half of the value included in his or her taxable estate and that one-half would be protected from taxation like any other asset up to $625,000 (in 1998). I have no idea why anyone would write such a statement.

Q: If I purchase additional life insurance, are irrevocable trusts always necessary to keep my estate from being inflated for estate tax purposes?

A: Life insurance has the potential of inflating one's taxable estate but usually this is a moot problem if the surviving spouse is the recipient of the proceeds, since anything going to the surviving spouse passes tax free and is not subject to the $625,000 limit. If the spouse dies first, then the survivor, whose life is insured, will have the ability to make adjustments, which would not be the case if the asset were locked into an irrevocable trust. Also remember that in about 6 years, a couple with tax Wills can pass up to $2,000,000 tax free without doing any other planning besides having the tax Wills.

Q: What do you think about a statement in a book I am reading that any attorney recommending that life insurance be paid to the estate as opposed to a third party has committed gross malpractice?

A: In Colorado many times insurance proceeds are payable to the Estate and this technique is not remotely considered malpractice. With unsupervised administration and with lawyers and personal representatives barred from charging a percentage, an extra $100,000 or $500,000 or $1,000,000 will have little effect on the cost or difficulty of settling an estate. Yet the Will can have these assets to fulfill bequests, including the funding of the tax by pass trusts (or "B" trusts).

The Colorado public is often subjected to these kinds of outrageous remarks. But congratulations on having the wisdom to seek a second opinion instead of just accepting what you see or read.

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