You may have heard that there are a variety of ways to leave your estate to your heirs so that you protect your assets from taxes and probate. Many of these hinge on whose name is on the title or account. Choosing the right type of ownership for your circumstances is essential, but keep in mind that what is "common knowledge" may be a misconception.
This estate planning video explains the four types of ownership in Illinois. Here are some factors to consider about each one before you create an estate plan.
1. Joint tenancy
If you and someone else co-own an asset or account, when you die, the other person becomes the sole owner. This sidesteps the need for probate and many of the fees and taxes associated with it.
Joint tenancy is not a failsafe, though. If you or your co-owner becomes incapacitated, the other has to become the legal guardian before making any major changes to the asset. For example, if you need to mortgage the home to cover your husband's long-term care and he cannot provide his signature, you must go to court and get the legal right to sign the documents on your own.
In another scenario, say you have a home, and you have added your adult child to the title as joint owner. If your child must declare bankruptcy, you may have to sell the home so that creditors can have your child's half of the proceeds to cover his or her delinquent debts.
2. Tenancy in common
In Illinois, a husband and wife are tenants in common when they purchase real estate unless they go through the process to create a joint tenancy. If you are tenants in common, you are not avoiding probate. In fact, instead of passing automatically to the other owner of the real estate, such as your spouse, the balance of the portion you own would go to the beneficiary you designate. While you could name your spouse as beneficiary, your percentage of the asset goes through probate as part of your estate. This can take months, and taxes and fees come out of the estate.
3. Sole ownership
If you have sole ownership of your assets and you want to leave them to your heirs, you may think that a will is the answer. While this may be the simplest way for you to deal with the eventuality of your passing, it may leave your beneficiaries with challenges. After you die, the probate court requires the executor of the will to conduct an inventory of assets and debts; pay the debts, estate taxes and fees from the estate; and distribute what remains to the beneficiaries. This process could take several months, during which time your children or other beneficiaries do not have access to the assets you left them.
4. Living trust
Many people believe they must have considerable assets in order to set up a trust. However, this is not true. A trust is like a safe deposit box. It starts out empty, and then you put assets into it. Instead of having the assets in your name or in both yours and your spouse's names, you can name the trust as the owner, with you and your spouse as the trustees. This form of ownership gives you complete control over the asset while you are alive. However, when you and your spouse die, the ownership of the asset goes directly and immediately to the people you have named as beneficiaries.
Because a living trust eliminates many of the issues associated with joint tenant ownership, tenancy in common and sole ownership while also providing greater control, many estate planning attorneys recommend this form of ownership.