What They Are Teaching in Law School

I went to an ethics meeting recently where the guest speaker was a law school professor. The attendees were attorneys, CPA's, CFP's, CLU's, Trust Officers and others. He talked about a lot of things, but one of the things he mentioned was related to joint tenants with rights of survivorship (JTWROS) accounts. He made the statement that he would never recommend that married couples open a JTWROS account. He said it would be better to open Tenants in Common accounts where the husband owns 50% of the undivided interest in the account and the wife also owns 50% of the undivided interest in the account. He went on to say that this was an easy way to split assets for estate planning purposes. If everything is in a joint account, then at first death, there are no assets that use the estate tax exemption. This was his reasoning. At first glance, this might make sense, but perhaps your humble blogger might be able to provide better alternative solutions.

What he did not explain to the attendees is that there are better solutions than putting married couple assets in Tenants in Common accounts. In addition, Tenants in Common accounts could own real estate and a Tenants in Common share is of an undivided interest. If one spouse were to die, then their property share would need to be sold. This might cause a loss in value, especially in a real estate market similar to today. This is not smart.

As you may or may not know, Tenants in Common accounts are subject to probate. Who benefits by probate? Attorneys, of course.

One alternative solution is to open individual accounts for the husband and wife and add payable on death clauses to them. This way you take advantage of the estate tax exemption and you bypass probate saving a minimum of 3% in most states.

Another solution is to draft Living Trusts for both the husband and the wife. There is better control of the disposition of assets and you can take advantage of the estate tax exemption. Living Trusts also bypass probate and their associated expenses.

There were some uneducated financial advisors in the room that were actually thinking about implementing the law professor's strategy of using Tenants in Common accounts. The law professor's argument was biased in favor of locking in future legal fees for the attorneys. I do not begrudge attorneys for earning their legal fees, but they should do so ethically. To me, it is just not ethical to follow the law professor's advice when better solutions are available at little or no cost.

No wonder they call Tenants in Common accounts TIC's. They can suck the blood right out of you.