There are different rules that govern the distribution of assets depending on the type of asset, similar to the way 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, without a right of survivorship, 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
- income taxes will be deferred as much as possible,
- federal estate taxes will be avoided or minimized,
- unnecessary probate will be avoided, and
- assets will stay in the blood line or, at least, not be lost to in-laws in an ugly divorce which divides assets, including assets you left to a loved one.
While joint tenancy with right of survivorship is a convenient way to own property, it may have serious unintended consequences such as
- exposing one joint owner to loss because the other joint owner is sued, and
- exposing the assets to the federal estate tax before it goes to the children.
Both of those outcomes can be devastating.
In addition, there are two deaths to plan for with a husband and wife, and we typically do not know who passes first. Thus, using a trust to avoid unnecessary probate on the second death is advisable, even for those of modest assets. Having to list all your items of personal property and their value on the inventory and appraisement and paying the treasurer a fee related to that value easily can be avoided.
When we do 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.
The moral of the story: Good estate planning is much more than who gets what. Good estate planning is income tax planning, estate tax planning, probate avoidance planning, asset protection planning, and then, who gets what, under what circumstances and in what manner.
Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate planning and elder law attorney. www.mwinnesq.com