Although a Will and a Living Trust are well-known vehicles for disposing of assets upon death, there are other ways in which this can happen. Let’s examine three of the most common.
Assets Passed Through Assigned Beneficiaries
Some assets have a designated beneficiary, or a person or entity that is the recipient of or will receive some or all proceeds of money or property held by the current owner upon a specified event or condition. Vehicles such as life insurance policies, 401(k)s, IRAs, and assets with a “Transfer on Death” or “Pay on Death” designation may require that a beneficiary be named. There are three types of beneficiaries:
- Primary beneficiaries are those first entitled to the proceeds;
- Secondary beneficiaries are entitled to proceeds only if no primary beneficiary is living when the insured dies;
- Tertiary beneficiaries are those entitled to proceeds if no primary or secondary beneficiaries are alive when the owner or insured dies.
Therefore, even if you have a Will or Trust, any assets that have a named beneficiary will transfer to that beneficiary upon your death. This is dangerous, and unintended consequences frequently occur because beneficiary designations trump a Will or Living Trust. Also, you cannot protect assets from taxes, creditors, divorce, etc. using a beneficiary designation form. Nor can you structure payouts of the assets to the beneficiary for health, education or support on a beneficiary form.
Assets Passed Through Joint Tenancy
Joint Tenancy is a form of ownership by two or more parties who share equal rights in and control of property, with the survivor or survivors continuing to hold all such rights on the death of one or more of the tenants. Unlike being a beneficiary, the person receiving the assets upon your death was already a joint owner in that asset.
Although a simple way to pass assets, it is not always the best way. Here are some reasons why:
- If you own an asset with your spouse, upon death, your spouse will lose your portion of the federal applicable exclusion amount – the amount that passes free from estate tax at death. This means that when your spouse dies, the exclusion amount will only include his or her exclusion of $5.49 million instead a $10.98 million combined amount. Depending upon your estate’s value, this could be a devastating financial blow to the surviving spouse.
- Joint Tenancy does not protect the assets from the other tenants’ creditors. If someone gets a judgment against any tenant, the entire amount of the joint tenancy property could be used to pay that judgment. This is true even before your death.
- The creation of Joint Tenancy in real property may be a taxable gift. However, for cash assets like joint banking accounts, it is not a gift until money is withdrawn by the non-contributor. Not understanding the different tax laws can either get you into trouble with the IRS or create tax liabilities you otherwise could have avoided.
- There is probably nothing worse that can happen upon your death than to have your heirs fighting over your assets. Joint Tenancy has the potential to create such friction because all tenants of your assets are linked together. If you have given a house to all your children, they are now all financially linked to one another and will have to agree in order to sell, rent, renovate, or move into the house.
- Joint Tenancy also trumps a Will or Trust. If you hold an asset as joint tenancy with 1 child, and your will says divide your estate equally among your two children, only the one child who is the joint tenant will inherit.
These are just a few of the problems with joint tenancy. So, although it is easy to establish, it may not be the best way to transfer your assets upon death.
Assets Transferred Through Intestate Probate
Intestacy is the condition of having died without a valid Will. This means your property will have to go through Probate. This is the process through which title is changed from the decedent’s name into the new owner’s name, as is the result if you have only a Will, but not a Revocable Living Trust. However, unlike when you die with a valid Will, you will have no control over where your assets eventually get placed.
The transfer of assets during intestacy typically goes to the spouse, then to the children, and then to the grandchildren. If you have no living spouse or children, the court looks back up your family tree and adds in parents, siblings, aunts, etc. Eventually, if no one can be found, your property could end up being transferred to the government.
The purpose of intestate succession statutes is to distribute your wealth in a manner that closely represents how the average person would have designed his or her estate plan, had you had a Will. However, this default can differ dramatically from what you really would have wanted. Even where it is known what you intended, no exceptions are made where no valid Will exists. Nor are there any exceptions made based on need or special circumstances.
It is possible for your estate to be controlled by both your own Will and the laws of intestacy. This would happen if the Will was poorly drafted and/or failed to dispose of all of your assets.
In essence, dying without a Will means that you did not devise a plan for the distribution of your assets, so the state law where you live will now control their distribution, whether your assets total 1 dollar or 100 million dollars. For some, the results may be desirable; for many, they can border on disaster.
Beyond intestacy, there are simply the problems of Probate.
Here are just a few:
- Probate can be costly and time consuming. Probate fees, including legal fees, court fees, appraiser fees, and executor fees can be as much as 1.5 to 10 percent of the entire estate. The average amount of time in Probate is nine months to one year. The process of Probate can cost your estate money and leave your heirs without your assets for a long period of time.
- Probate is public, particularly an intestate probate. Anyone who chooses to go to the courthouse can find out details concerning your life and your financial assets. Additionally, if you have a family business, much of the financial details of that business will also be available at the courthouse. This could be detrimental to the business if the wrong information falls into the hands of the business’s competitors.
Most people who understand the process of Probate do what they can to minimize its effects or to avoid it. In fact, once you understand what happens to your loved ones when you die without a properly drafted Will or Trust, you will want to avoid causing them problems after you are gone. No one really likes to think of their death, but acknowledging the fact that everyone dies and then taking steps to plan your estate in a way that helps your family rather than hurts them is the responsible thing to do.