How to set your estate plan up for success

Here are 4 ways to pass on assets and how to coordinate between them.

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Key takeaways

  • Assets can be distributed at death in several ways, such as with a beneficiary designation, through a jointly held account, by probate, or a trust.
  • Each method of transfer has advantages as well as important considerations.
  • In order to be successful, it's critical for your estate plan to coordinate between these methods.

When thinking about estate planning, many families focus on creating a will and/or trust. But it's critical not to neglect other ways assets can be transferred—either directly to beneficiaries who are named on accounts and policies, or by operation of law when assets are owned through joint tenancy with rights of survivorship (JTWROS), typically for real estate or other assets.

Unlike a will or trust, passing on assets via beneficiary designation and JTWROS is generally easy, low-cost, and like a trust, avoids probate—that is, the often-expensive and time-consuming process of transferring assets through a court process whether through a will or a state's inheritance laws. However, because beneficiary designations and accounts held as JTWROS supersede both wills and trusts, a lack of coordination between those methods and the rest of your estate plan could jeopardize your entire estate plan and have significant unintended estate tax consequences. 

For example, let's say that Sally's revocable trust provides that all assets pass equally to her 3 children. However, her IRA beneficiary designation has not been updated since her first child was born and names only 1 of her 3 children as a beneficiary. Upon her death, that child would inherit 100% of Sally's IRA.

Or consider Mitch, whose will leaves assets in trust for his 20-year-old son, whom Mitch believes needs help managing the assets until he is 35. However, his son is also named as the transfer on death (TOD) beneficiary for his investment accounts. As a result, if no changes are made to the TOD designation, his son will receive those assets outright, rather than in trust.

In those situations, even though Sally and Mitch likely spent a considerable amount of time and money putting wills and trusts in place that reflected their goals and objectives, their intentions were thwarted because their account titling and beneficiary designations were not aligned with their wills and trusts. 

To help remedy this disconnect, review 4 basic ways assets can be distributed at death, and some of the key considerations of each.

1. Passed to a beneficiary

This most frequently applies to life insurance policies, annuity contracts, retirement accounts such as IRAs, 401(k) plan accounts, and Roth IRAs, and savings and investment accounts.

Considerations:

  • When naming individual beneficiaries, you lose the protection that passing assets in trust for that beneficiary may provide.
  • For accounts that increase and decrease in value, you may not be able to easily assess how much is being left to each heir.
  • Beneficiary designations must be updated each time a new account is opened.  It's not uncommon to see an old account with a named beneficiary and a more recent one without.  
  • If the primary beneficiary and contingent beneficiary die before the account owner, the account will pass through the probate process and according to the heirs identified in the owner's estate plan or the laws of intestacy.
  • It may cause difficulties for the executor of the estate if there aren't enough assets passing through probate to satisfy the expenses, debts, and taxes of the estate.

2. Passed by law

These are typically assets passed by JTWROS (or in the case of married couples, also tenancy by the entirety), often real estate or joint bank or investment accounts. In these cases, at the death of one owner, the property automatically transfers to surviving owner(s) outside of probate (and outside of any provisions in a client's will or revocable trust). In states with community property laws, spouses are usually co-owners of any assets acquired after the formation of the marriage. Community property may be transferred automatically, provided the asset is properly titled, and/or by a community property agreement.

Considerations:

  • There are 2 other types of joint ownership, known as tenants in common and community property (without right of survivorship).  In those cases, when a joint owner dies, that owner's property interest becomes part of the deceased owner's estate and subject to probate.
  • If the other party in a JTWROS agreement is a nonspouse, the asset may be subject to gift taxes.
  • Since the asset may be accessible to the co-owner's creditors, there may be asset protection and liability concerns.

3. Passed via trust

In this arrangement, the trustees of the trust hold the trust assets on behalf of beneficiaries, and they are passed based on what the trust agreement specifies. 

Considerations:

  • A trust only governs assets owned by the trust; that is, trust assets include only those assets titled in the name of the trust. 
  • In some cases, a will may be relied upon to transfer assets to a trust at death.  This type of will is referred to as a "pour-over" will.  However, any assets that pass through a will are subject to probate.

4. Passed by probate

Generally speaking, if an asset does not pass by law, contract, or trust, then the assets will usually pass to heirs via a will through a legal process known as probate.  Depending on the value of the estate and which state the deceased resides in, probate could take as long as several years, and fees can be significant.

Considerations:

  • Probate is a public record, so it decreases the level of privacy for the family. 
  • If the deceased owned real estate in more than one state, the deceased's assets may be subject to probate in more than one state.  This is referred to as "ancillary probate" and can further complicate the settlement of an estate since each state has its own set of rules and procedures for the process.

Work with a professional 

Finally, keep in mind that each individual situation is unique—different types of assets, different goals and objectives, different state laws—which means that there is no right way to provide for the distribution of assets. It's best to seek counsel from financial, legal, and tax professionals when considering what makes sense given your unique situation.

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