An overuse of joint ownership may cause your heirs to pay tax that could have been avoided. Suppose, for example, Mike Johnson dies in 2008, when the federal estate tax exemption is $2 million. All of his assets are held jointly with his wife Karen, so she inherits everything.
Further suppose Karen dies later in the year, with a $4 million estate. Her estate is $2 million over the $2 million threshold so $900,000 is owed to the IRS, at a 45 percent estate tax rate. Instead, Mike could have left $2 million to his daughter Liz. Then Karen could have left Liz $2 million, sheltered by her estate tax exemption.
This basic plan would have avoided federal estate tax. However, because all of Mike’s assets were held jointly, he had no assets to pass to Liz so his estate tax exemption was wasted. The IRS collected $900,000 in estate tax that need not have been paid. Therefore, if estate tax is a possibility, both spouses should have assets they can leave to someone else and thus use both federal estate tax exemptions.
