Making or revising a will can be a timely gift for leaving wise legacy later

If you're looking for something special to give your husband or wife for Christmas, how about a will? That may not seem like the most cheery of holiday presents, but there are many couples who do not have wills or perhaps have wills written at a simpler time and are now in need of updating. Also, all they own is in ``joint ownership,'' which seems simple, but it can cause complicated problems.

Instead of just deciding who gets what, couples with a fair amount of accumulated assets have to think about who owns what. Although joint ownership, where the two of you own everything together in both names, may seem romantic, it can lead to heavy taxes, unintended distribution of your assets, family feuds, and a public airing of your estate.

``People think passing on an estate is easy, no problem,'' says Donna Brown, a vice-president in the trust department at State Street Bank & Trust Company in Boston. ``But there definitely are perils.''

The 1981 tax law may have caused some of the confusion about joint ownership. It provides for a completely tax-free transfer of an estate from one spouse to another. But there are at least two things that can go wrong.

First, if the couple has no children and the husband passes on first, the entire estate goes to the widow. So far, no problem. But when she passes on later, also without a will, her surviving relatives will get everything under state laws known as laws of intestacy. Her husband's family gets nothing.

Second, if the couple do have children and the father passes on first, the entire estate still goes to the mother tax-free. If she doesn't make a will after that, the children do inherit the estate, but they also inherit the full estate-tax burden, and they have to go through probate as well. Not only is probate complicated and delaying, but all assets handled by a probate court become public record, available to anyone, including con artists, who might want to spend time in a county building or court house to see how much money you've left your family.

To avoid these problems, Ms. Brown suggests that couples not only have a will but set up a trust document as well. ``The will is what we consider the estate planning tool,'' she says. ``The trust is the vehicle for managing the estate and passing it on the way you want.''

One way to avoid probate is to get together with your attorney and set up a revocable living trust. Here, you agree to transfer ownership of your assets to a trustee while you are still alive. You keep control of those assets, because the trustee is working for you. The trustee can also distribute assets to other beneficiaries while you are alive. You can be one of those beneficiaries, too, and receive income from the trust.

When you pass on, the assets in the trust can go automatically to your heirs, or the trust can continue and provide income to them.

Another way to avoid having your estate taxed heavily is to assign some assets to the husband, some to the wife, and some to both of you. This is particularly important for people with substantial assets, Brown notes.

The 1981 tax law included a sliding scale for tax-free gifts. In 1982, the lifetime allowance was just $225,000. Next year, the limit will be $500,000, and by 1987 it reaches $600,000. This means that a husband could transfer up to $600,000 to his wife in 1987, for a more even split of their assets.

Of all your possessions, the house is the one thing that should not be held jointly. If the house has appreciated greatly since it was purchased and it is held in both names, the tax folks figure half of it belongs to the wife and half to the husband. So if the husband passes on and the wife sells the house later, she will be taxed on the capital gain on her share.

Let's say a couple bought a house for $25,000 some 15 years ago. Today, it's worth $150,000. So each person in a joint-ownership arrangement is assumed to own $62,500 of the $125,000 profit. If the widow later sells the house, her capital gain is based on that $62,500. But if the house had been in the husband's name, it would have passed to the wife tax-free and the current $150,000 value would be the new basis. So if she sold it for $150,000, it would be assumed she made no gain, thus no tax.

Joint ownership can make sense if you want to shift property from a higher bracket to a lower one, like a mother to a child, or to protect your property from creditors. Otherwise, it can lead to problems with the tax man, the courts, and your other relatives.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given.