Essential Estate Planning - Part II

August 27, 2002

In Part 1, I covered many of the documents that you should have, particularly if you are partnered. In this month's column, I will cover one more that I think is important to have, and I'll discuss joint ownership and other non-probate ways of leaving an estate to someone.

Hospital Visitation Declaration

Even though you and your partner have named each other in your medical power of attorney, you should have this document, which declares who may visit you and who can make decisions about who visits you, should you be in the hospital. Most hospitals won't need this, but sometimes they can make it difficult for you to visit your partner, particularly if there are legally recognized family members who object to your presence. There isn't any set format for this document - I simply put in there that the declarant designates some individual as the person who is given first preference for visitation in a hospital or other medical facility unless the declarant himself tells the staff otherwise. If you have particularly obnoxious relatives, you could also put a statement in there that person or persons should be specifically excluded from visitation unless you say otherwise.

I have this document witnessed and, in Texas, I use a self-proving affidavit which has the legal effect of not requiring the appearance by the witnesses.

Probate Laws and Probating Wills

When someone dies, their estate is disposed of in a special process called probate. If the deceased has a will, the probate judge will generally follow the wishes expressed in that will. If the person dies without a will (that is, they die intestate) the judge will have to follow the state's laws regarding determination of heirship and disposition of the person's property. With the exception of Vermont, which covers this area in its civil union law, gay partners are not considered heirs unless specifically designated in a will.

Even if you have a will, it can be contested in a probate proceeding. These will contests can be real messy, particularly if the decedent's family is hostile to the gay relationship. These days, most judges will not overturn a will simply because a person left everything to his gay partner but you don't want to give someone a reason to overturn or modify a will by not having a well-written will.

Joint Tenancy and Other Non-Probate Dispositions

One way to avoid having property disposed of via the probate proceeding is for couples to own property jointly. Any property can be held jointly - including cars, houses, boats, etc. However the requirements are slightly different depending upon the type of property. The more property that is passed this way, the less that passes through a will. There may also be some tax savings since you would at least avoid estate taxes on this property. Be sure to talk to a tax advisor if you have a lot of property. Joint ownership is often called joint tenancy, particularly when it involves real estate, and it is not restricted to two people - there can be multiple joint tenants.

Simply owning property jointly is not enough, however, to avoid probate. If a gay couple jointly own a house, for instance, when one person dies, the deceased's undivided share of the house (usually half) becomes part of that person's estate unless the property is owned jointly with a right of survivorship. That last phrase is key and must be used in all jointly owned property situations unless you intend for the share to go to someone based on your will.

Personal property, such as art work, furniture, or anything else of that nature, can be secured by use of a joint ownership agreement. This is simply a document that describes the property and declares that it is held jointly with a right of survivorship. Although this should be witnessed, the document doesn't need to be filed anywhere and can be put in any safe location, such as a safe deposition box or fireproof safe, along with other important papers. For cars, boats and other property that require a certificate of title, you can list both names on the title, although there is no requirement to do so.

For real estate that is jointly owned, such as a house or other building, a phrase like to be held in joint tenancy with right of survivorship must appear in the deed, so be sure to check this even if you think it's there. If it isn't, a real estate attorney can file a new deed for you with the modification - it's considered a minor change. Alternatively, you can have a deed held in escrow transferring the undivided share to the living partner, subject to a joint ownership agreement. The escrow company would hold the deed until one partner died and then transfer that person's share to the remaining partner. I like the first method better - it's cleaner and doesn't require the remaining partner to do anything after the other partner's death.

Other types of things that are non-probate dispositions are naming someone as a beneficiary. For example, if you take out an insurance policy and name your partner (or anyone else) as beneficiary of the policy, the insurance company pays the beneficiary and not the deceased's estate.

If you have a joint bank account or other shared account, you will often find that the bank or brokerage firm will set this up as jointly owned with right of survivorship. But be sure to check. For non-joint accounts, such as your personal checking account, you can make these payable on death (or POD) to a particular person. In a POD account, the person you designate is issued a check for the remaining balance in the account upon showing proof of the account holder's death. Just remember a POD account is closed at this time and, unless the account holder has given the designated person signing authority, they can't issue checks.

Finally, although you may have financial power of attorney over a person or may be a guardian of a person's estate, these rights cease when that person dies. This means you no longer have the right to handle financial or other matters for that person and bank accounts you may have used are no longer available to you.

Rights of Contribution

Joint tenants own undivided shares of the jointly held property unless they have a written agreement that states otherwise. Without such an agreement, for example, one joint owner could rent the property to someone else, without the permission of the other owner and collect rent. It also means that partners who contribute unequal shares may feel a little cheated by the other partner if they have contributed more than one-half of the cost of the property. Fortunately, the laws associated with joint tenancy provide a right of contribution under which the joint tenants can even things out. The following example should explain this concept in the most common scenario for us, where two gay partners buy a house together.

Let's say the two partners (we'll call them Hans and Franz after the bodybuilders from Saturday Night Live) buy an $80,000 house for $50,000 down and a mortgage of $30,000. Hans, who has a few more personal training clients, puts down $45,000 and pays $650 monthly. Franz, who's not doing as well but is a great carpenter, puts down $15,000 and pays $450 monthly toward the mortgage. I'll ignore closing costs here.

Franz adds on a room and does some other improvements and Hans buys the building materials. Two years later, they sell the house and, after paying off the mortgage and costs, they net $80,000. If they had both contributed equally, they each would have equity of $40,000. However, Hans put down $45,000 so he should at least get the additional $5,000 from Franz's share. In addition, Hans was paying almost 60% of the mortgage and Franz was only paying 40%. To be fair, Hans should be getting slightly more of the increase in value of the house than Franz. Since the total equity in the house increased in value by $20,000 (80,000 - down payments of 45,000 and 15,000), Hans' share of this would be $12,000 and Franz's would be $8,000. Thus, the fair split of the equity would be $57,000 for Hans (45,000 plus 12,000) and $23,000 for Franz (his 15,000 down payment plus 8,000).

Now that doesn't reflect non-cash, or sweat equity. Franz personally added on a new wing to the house that added much of the value of the house. Even if Hans paid for the building materials, what is the value of Franz's labor? Just because two people have different incomes and are therefore unable to contribute an equal financial share doesn't mean that these things don't equal out in other ways. In other cases, a partner with more money may decide that his contribution of a larger share is a gift to his partner and that equals the shares.

When two partner buy and hold property jointly, they need to agree upon how they will split the equity and what right of contribution each has. If the shares are equal, you don't have to do anything but if they are not, then decide how you want to split these things and have a local attorney draw up a joint tenancy agreement that details this agreement. That way, each of you is protected from debts or judgments that the other partner may incur and, if you break up, it's one less thing to fight over.

Debts, Liens and Joint Tenancy

In all cases, the surviving partner takes the deceased partner's share in the jointly held property subject to any liens on the property (such as IRS liens, judgement liens or mortgages). If the deceased partner had unsecured debt, such as credit card debt, it's possible that the creditor can bring a claim against the deceased's half of the jointly held property. However, you may be able to persuade them to go to the probate court, where the judge will settle the debts out of the remainder of the estate. One exception, though, is federal guaranteed student loan debt - this debt is erased when you die.

However, a creditor doesn't have to wait for a joint tenant to die before attempting to collect a debt. If you default on a non-secured debt, for example, the debtor can eventually get a judgment against your property, and this includes your share of any jointly-held property. That's why you need to get a written agreement on any right of contribution you may have because otherwise, your share (and your partner's share) of the jointly held property are equal and a debt-free partner could end up in a bankruptcy proceeding because of his partner's failure to pay debts.

One thing I suggest partners do is write down their agreement regarding joint ownership. The statement on the deed is sufficient to pass ownership of one partner's share to the other, but this should be subject to any right of contribution, just in case a debtor gets a judgment against the house. See a real estate lawyer and have this drawn up. He or she should file this wherever your deed is filed so that any creditors would be on notice that they will only be able to go after the debtor's equity in the house. That may not stop them from going forward - they could still get a judgment lien against the property - but it would only be against the debtor partner's share and the non-debtor would be less likely to have to prove up his share in court.