Most of my clients are familiar with a “will.” You probably are too. A will is an important document that allows you to name guardians for your minor children and designate beneficiaries to receive your property after your passing. You might even have downloaded one of those “one size fits all” wills off the internet at some point in your life, maybe after your first child was born or after the passing of a loved one. But most clients are surprised to learn that a will—even if it’s drafted by an attorney—probably isn’t going to control the bulk of their assets after they die. That’s right, even if you take the time and spend the money to create a will, there’s a good chance it’s not going to govern the distribution of most of your assets. To understand this concept in more detail, let’s review the four ways property can pass after a person’s death:
1) Joint Tenancy with Right of Survivorship (Operation of Law)
The very first thing that determines who receives assets after a person’s death is whether the property is owned jointly with one or more other persons and if so, whether it has what’s known as a “right of survivorship.” A Right of survivorship is often the default method of ownership between married couples and dictates that when one owner dies, his or her interest in the asset extinguishes and the asset automatically transfers to the survivor(s).
Major Problems: A Right of survivorship automatically takes precedence over the decedent (i.e. dead guy)’s will. This can often create unexpected results. For instance, when assets are owned with a right of survivorship, upon one owner’s death, the surviving joint owners will automatically own it all. If the survivor then adds a new spouse, child, or friend to the deed, the property will continue to pass outright to the last survivor, regardless of the original decedent’s wishes and without ever considering the tax implications of such transfers. Further, using a right of survivorship prohibits passing property to the recipient in trust—a critical component of asset protection planning.
2) Beneficiary Designation (Third Party Contract)
If assets do not pass by right of survivorship, the next thing to look for is whether they contain a beneficiary designation or pass to a third party by contract through a transfer on death (“TOD”) account or pay on death (“POD”) account. TOD or POD accounts are common methods of owning bank accounts, CD accounts or securities. Meanwhile, IRAs, Qualified retirement plans such as 401(k) plans and pension plans, and life insurance all include beneficiary designations. Collectively, these assets, along with a person’s residence, often constitute the bulk of a person’s estate and will automatically pass outside their will.
Major Problems: Again, when assets contain a beneficiary designation, that designation will trump the decedent’s will. The named beneficiary or beneficiaries will automatically receive the property outright instead of in trust for the beneficiary. This causes a loss of control. In addition, beneficiary designations also are not effective methods of tax planning for the decedent. All of these problems can be avoided by naming a Revocable Living Trust as the beneficiary.
3) Individual Ownership
If a decedent’s assets don’t pass by right of survivorship or by beneficiary designation, then next thing to look for is to see if the asset is owned in the name of an individual, or perhaps by more than one individual but without a right of survivorship. If so, the asset will be subject to probate, and will pass according to the terms of the individual’s will. In the unfortunate–yet all too common–scenario where a person doesn’t have a will, the property will pass “intestate” according to the particular state’s laws of succession.
Major Problems: Although a decedent’s assets eventually do get distributed according to his/her wishes, they will need to go through what’s known as “probate.” More on the probate process in a separate post, but to summarize, probate is a lengthy, public, and expensive process whereby a court supervises the transfer of a decedent’s assets to his/her beneficiaries. Probate can easily be avoided through the creation and proper funding of a Revocable Living Trust.
4) Revocable Living Trust
Finally, if assets do not pass by one of the first three methods, the assets must be owned by a trust. Think of the trust as a bucket (as I’ve elaborately illustrated below) that contains all of your assets. If you become incapacitated or ultimately “kick the bucket,” the terms of the trust will dictate how the assets should pass to the beneficiaries. Assets may be passed outright or in trust—thereby providing the beneficiaries with significant protection from creditors or predators.
Major Advantages: There are numerous advantages to the revocable living trust (“RLT”). I’ve highlighted just a few below:
- Incapacity Planning– Provides one planning document full of instructions for your care and the care of your loved ones upon your incapacity. Powers of attorney cannot provide those instructions and wills cannot work until they go through probate after your death.
- Efficient Transfer of Assets– Facilitates continuity in the handling of your affairs by efficiently transferring your property to your loved ones, in accordance with your wishes, after your death without court intervention. In comparison, probate takes far more time and money, and isn’t always smooth.
- Protection of Grantor’s Interests– Allows you to appoint a “trust protector” who has authority to modify your estate plan to protect assets from creditors of beneficiaries, take advantage of tax savings opportunities, and update the plan in the event the law happens to change—all without a court’s approval.
- Ensure Privacy– Ensures your family’s privacy following your incapacity or death by avoiding guardianship and probate on all assets owned by your trust. Guardianship and probate are public and anyone can obtain the information in those files.
- Valid in every state-Easily moves with you from state to state because it is valid in every state. Wills are designed to be valid and interpreted in the state they are drafted in. Even worse, an ancillary probate is usually required in every state in which you own real property not titled in the name of the trust.
- Tax planning– For married couples, an RLT achieves greater death tax objectives by using both exemption equivalents. This is done far more efficiently in an RLT than in a will.
If you have any questions regarding a will or living trust or would like to schedule a free estate planning consultation, call us today at 480-442-4175 or email us at [email protected].
