I received this question from V.G., in Bath Beach, New York, who recently wrote and said:

My wife and I have approximately $860,000 and I understand that if I leave all of my estate to her there won't be Estate Taxes due. Our house, owned jointly, is worth about $350,000, we jointly have stocks worth about $385,000 (they fluctuate), my IRA, of which my wife is beneficiary, is approximately $48,500 and the rest, about $76,500, is in a joint bank account with my wife and son so that if my wife and I cannot pay bills, he will be able to make payments for us. I have two daughters, also. Am I right about there being no Estate Taxes due?

Dear V.G.:

There will be Estate Taxes due, should you pre-decease your wife, but only upon your wife's demise. Almost $80,000 in Federal and New York State Estate Taxes.

From what you've told me, I will assume your wife wants to do the same thing as you, that is, to leave everything to you if she pre-deceases you. I will further believe, because this is what most parents arrange for the "natural objects of their bounty", that upon the surviving spouses death, all the assets are to pass equally to your three children.

The first issue that arises is that you've left part of your estate to your son, in the joint bank account. I firmly believe the use of joint accounts, with anyone other than your spouse, is an "inviting trap". Upon depositing the funds in the account, you made a present gift (for Federal Gift Tax purposes).

Not only is this a taxable gift, but you may have lost control of a portion of the funds. This is because your son has the right, whether or not he intends to exercise it, to withdraw one-third of the funds at any time. More importantly, anyone your son owes money to, present or future, should they learn of the account, has the right to the one-third. In addition, should a joint tenant become disabled, the others may have to obtain a court order before funds can be withdrawn from the account. This is not what you intended.

Finally, about joint tenancy, should your son survive both you and your wife, he will take 100% of the joint assets to the exclusion of your daughters. This means they will lose out on more than $25,000 each, your good intentions notwithstanding. Use of joint accounts for Estate Planning is an "inviting trap".

Now, lets take a look at the Estate Tax consequences of your actions. Your wife's and your total estate is $860,000. Upon your decease, the house and stocks will pass directly to your wife and from what you've said, the IRA assets will become hers also. She should consult a good Estate Planner before taking any IRA distribution because she might save income taxes with proper structuring.

This gives your wife a total of $783,500. She will also have one-half of the joint account (your son gets one-half as there will now only be two joint tenants), or $38,250. Her estate will be worth $821,750.

Upon her death, assuming zero appreciation of the assets and $51,750 of Probate and other fees, yielding a net taxable estate of $770,000, the Federal government will collect another $42,590 and New York State will collect $36,400, for a total of $78,990.

With proper Estate Planning, the total assets which pass to each of your children (equally) might have been $270,000 (total $810,000) instead of what your situation might be: $294,100 to son, and $217,600 to each daughter (total $729,300).