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 move 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 that simple though because while we want to make clear who gets what asset under what circumstances, we also want to make sure that (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 least, not be lost to a lawsuit or to an in law in a divorce.
For instance, while joint tenancy with right of survivorship is a convenient way to own property, it may 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 (1) and (2) above can be devastating. Example of unintended consequences: Mom puts daughter on account. Daughter gets sued. Mom loses account. It would be better to make daughter trustee with authority to act as a trustee.
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.
The layperson just wants 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. That is our job.
Good estate planning involves much more than deciding who gets what. Good estate planning is income tax deferral planning on IRA’s, estate tax planning, probate avoidance planning, asset protection planning, benefits planning (Medicaid, etc.) and then, who gets what, under what circumstances, in what manner (leaving assets “in trust” can protect them from lawsuits and taxes, and keep them and keep them in your family.)
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