A testamentary trust, created within a will and taking effect upon death, presents unique challenges when dealing with property held in joint tenancy with right of survivorship. Successfully navigating these issues requires careful planning and understanding of how estate law intersects with property ownership, especially in California where probate rules can significantly impact estate distribution.
What happens to jointly owned assets if my will creates a trust?
When a will establishes a testamentary trust, and you own property jointly with another person, the handling of that asset depends on the type of joint ownership. If the property is held as “joint tenants with right of survivorship,” it automatically passes to the surviving joint tenant outside of the will and therefore, *not* into the testamentary trust. This is a common source of confusion. However, if the joint tenancy has been severed before death – perhaps through a formal agreement or transfer – the deceased’s share *would* be subject to the will and could be directed into the testamentary trust. It’s crucial to remember that a will has no power over assets that have a clear beneficiary designation that exists outside the will, like joint ownership with right of survivorship, or pay-on-death accounts. Approximately 60% of estates involve some form of jointly held property, highlighting the importance of understanding these rules.
Can a testamentary trust *ever* control jointly owned property?
While a testamentary trust cannot directly control property held in joint tenancy with right of survivorship *at the time of death*, estate planning can be structured to bring such assets *into* the trust eventually. This is often achieved through a “pour-over” will. A pour-over will essentially states that any assets not already held in a separate trust (like a revocable living trust) are to be “poured over” into the testamentary trust created by the will upon death. This requires careful drafting to ensure the pour-over operates effectively and doesn’t create unintended tax consequences. For example, consider a husband and wife who own a home as joint tenants. The wife’s will contains a pour-over clause to a testamentary trust. Upon her death, the house still automatically goes to the husband. But, upon *his* subsequent death, any remaining assets (including the now solely-owned house) will pass into the testamentary trust to be distributed as directed. This is a common and effective strategy.
What if my spouse and I both have wills creating testamentary trusts, but we own property together?
This scenario requires meticulous planning, given the intricacies of community property law in California. All assets acquired during marriage are generally considered community property, owned 50/50. When a spouse dies, the surviving spouse inherits their half of the community property. A significant tax benefit exists: the surviving spouse receives a “double step-up” in basis for the entire asset, meaning the cost basis is adjusted to the fair market value at the time of the first spouse’s death. This can significantly reduce capital gains taxes if the property is later sold. Any separate property owned by the deceased will be distributed according to the terms of their will, potentially including the testamentary trust. However, the surviving spouse’s rights to community property supersede any conflicting instructions in the deceased spouse’s will regarding those assets. It’s essential to coordinate both wills to ensure a seamless transfer and maximize tax benefits.
I’ve heard about problems with people contesting wills and trusts – could that affect how jointly owned property is handled?
Contests to wills and trusts are unfortunately common, and can significantly complicate the handling of assets, including those held jointly. California law narrowly enforces “no-contest” clauses (also called “in terrorem” clauses), which attempt to discourage beneficiaries from challenging a will or trust. These clauses only apply if a beneficiary directly contests the will or trust *without* “probable cause.” A challenge based on valid grounds, such as undue influence or lack of capacity, wouldn’t trigger the clause. However, even a seemingly valid contest can create delays and legal expenses. I recall a case where a brother contested his sister’s will, claiming she wasn’t of sound mind when she signed it. The legal battle dragged on for years, draining the estate’s assets and causing significant emotional distress for the entire family. Eventually, the court sided with the will, but the damage was done. Proper estate planning, clear communication with family members, and a well-drafted will and trust can minimize the risk of such disputes. Formal probate is required for estates over $184,500 in California, and the statutory fees for executors and attorneys can be substantial, often a percentage of the estate’s value.
720 N Broadway #107, Escondido, CA 92025Successfully navigating the complexities of testamentary trusts and jointly owned property requires expert legal guidance. Steve Bliss, ESQ. specializes in estate planning and probate law in Escondido, California, and can help you create a comprehensive estate plan that protects your assets and ensures your wishes are carried out. Contact him today at (760) 884-4044 to schedule a consultation.
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