There are different rules that govern the distribution of assets, depending on the type of asset. You can sort of think of it like different chess pieces moving differently.
For instance, if assets are owned jointly with the right of survivorship, they pass to the survivor(s) by operation of law. Typically, all that is needed is a death certificate to make the transfer take place. No probate is required.
If assets are owned as tenants in common, when one joint owner passes there usually needs to be probate to accomplish the distribution of the asset.
If the asset is a retirement plan or life insurance, the beneficiary designation on file with the custodian is what governs the distribution of assets.
If that was all there was to estate planning, it would be easy.
It is not easy, though. Why? Because, while we want to make clear who gets what asset under what circumstances, we also want to make sure of the following:
1. income taxes will be deferred as much as possible,
2. federal estate taxes will be minimized,
3. probate will be minimized, and
4. assets will stay in the blood line or, at the least, not be lost to in-laws in an ugly divorce.
For instance, while joint tenancy with right of survivorship is a convenient way to own property, it might have serious unintended consequences such as:
1. exposing one joint owner to loss because the other joint owner is sued, and
2. exposing the assets to the federal estate tax before it goes to the children.
Both these circumstances can be devastating.
Also, let us consider the beneficiary designation on IRA’s or retirement plans. If these assets are paid to spouse and spouse rolls them over, it could make the surviving spouse’s estate unnecessarily exposed to the federal estate tax.
In the law of estate planning, we have to know and apply a variety of laws, namely, the law of trusts, the law of contracts, the law of property and future interests, the law of income taxes and federal estate taxes, and probate law. We have to accomplish a variety of objectives, namely proper distribution, income tax avoidance or deferral, estate tax avoidance or minimization and asset protection.
People just want to get their affairs in order and obtain peace of mind. The professional advisor wants the client to obtain that peace of mind, but we need to be aware of everything and how all these rules will or may apply.
Good estate planning is much more than deciding and stating who gets what. It is income tax planning (tax deferral on retirement accounts, and step up in basis), estate tax avoidance planning, probate avoidance planning, asset protection planning, and then, who gets what, under what circumstances, in what manner.
Assets can be left so they stay in your blood family and are protected from lawsuits and estate taxes or free of trust where those protections do not exist.
Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate and elder law planning attorney. mwinnesq.com