Jointly held property can become a nightmare

Interestingly, some 75 percent of the people in this country die intestate, or without a will.

Many opt for the so-called "poor man's will" jointly held property. However, if used excessively or by the wrong parties (such as unmarried individuals), jointly held property can become a nightmare of unforeseen tax and non-tax problems.

Consider these potential complications:

Property titled jointly with someone other than a spouse can potentially trigger both federal and state gift taxes.

Property held jointly with someone other than a spouse (for example, with a child) may be subject to double federal estate taxation. The entire property will be taxed in the estate of the first to die on the basis of contribution.

While husband and wife are deemed to own jointly held property equally for tax purposes, the tax on property held jointly with another individual is determined by the amount each contributed.

If the deceased contributed 100 percent to the account or property, it is fully taxable in his or her estate. Any amount the survivor receives and does not consume or give away will be included (and, guess what, taxed a second time) in the survivor's estate.

The provisions of the decedent's will become ineffective once jointly held property passes, by right of survivorship, to the survivor. The survivor may or may not be the same person named in the will, or it may be that the deceased's real intent was for the property to be used to fund a trust.

Jointly owned property passing by survivorship can equate to a total loss of control by the deceased. The survivor, spouse or another individual, can simply ignore the decedent's wishes as to the ultimate disposition of the property. The loss of control can be especially horrendous when the joint owners are not related.

Even a surviving spouse, however, can give away, or at death leave, the formerly jointly owned property to anyone he or she wants, regardless of the desires of the deceased spouse.

As stated, jointly held property passes directly to the survivor, who could give away the property, lose it to creditors, gamble it away or squander it. The decedent's executor, meanwhile, could face a lack of liquidity to pay the decedent's debts, expenses of the estate or estate taxes.

In the case of spouses, the effective exemption amount of $675,000 passing free of federal estate tax for those dying in 2000 is wasted in the estate of the first spouse to die. This becomes even more important as we approach the year 2006, when the effective exemption increases to $1 million.

Holding property in joint tenancy can thwart the objectives of a well-drawn estate plan, which is designed to avoid unnecessary and possible double taxation.

By passing at least a portion of the estate into a credit equivalent bypass trust, up to $675,000 can be sheltered from federal estate tax at the first spouse's death and will not be subject to federal estate tax in the estate of the second spouse to die.

The surviving spouse's estate also has an effective exemption amount of $675,000 in 2000. The estates of both spouses, therefore, could shelter up to $1,350,000 together should both die this year. The misuse of joint tenancy could cause an unnecessary tax bite of $250,000 or more.

A wise person learns and profits from the lessons so many have learned the expensive way in terms of money and heartache. A ....look at your personal situation could be worthwhile.

(Kenneth R. Cain, a certified trust and financial advisor, is a senior vice president with Springfield Trust Company.)