Unfortunately, there remains a great deal of confusion as to how assets pass at the time of death. Most people think their will transfers all assets, while others think they transfer through living trusts. Both are, in fact, correct but only partially. Assets transfer at death by operation of law — more commonly understood as property titling — or through beneficiary designation. Understanding these concepts can be the key to a successful transition of your assets as you intended.
Let’s look at some examples:
Let’s say you have a properly executed will, and you hold title to your bank account solely in your name. Because you are the sole owner of that account at the time of your death, its disposition will be dictated by your will. On the other hand, if you held it as a joint tenant with right of survivorship (JTWROS) with your spouse, it would automatically pass to your surviving spouse no matter what your will says. The operation of law (how you held title to that property) supersedes what you’ve said in your will. That is a very important concept to grasp and is often misunderstood.
If you have life insurance or retirement accounts, you already know you had to name primary and contingent beneficiaries. When you pass away and the custodian has been presented with a copy of the death certificate, the assets will pass to the named beneficiaries. If the primary beneficiary has predeceased you, the assets will pass to the contingent beneficiary. Again, no matter what your will instructs, these assets will pass by the specific beneficiary designation. It’s crucial that you take this into consideration as you do your estate planning.
It is very important that you review and update your beneficiary designations, or — as in the case of a divorce — you may face unintended consequences. I’ve witnessed situations where someone has passed away and their former spouse was still named as the primary beneficiary. Because the beneficiary designation was never changed, the former spouse is entitled to and will receive the assets. That can be an unfortunate, unintended consequence for the remaining heirs. The only solution to that particular situation is for the former spouse to renounce their claim and allow it to pass to the contingent beneficiaries.
Living trusts are effective tools in estate planning for a variety of reasons, especially probate avoidance. To function properly as well as avoid probate, they must be properly funded by the retitling of assets into the name of the trust. Too many people pay significant attorney fees to have the documents drawn, only to fail to fund them by not retitling assets into the name of the trust. If assets are not retitled and a death occurs, the main function of the living trust — avoiding probate — is forfeited.
One of the most important steps you can take in your estate planning is to ensure that your assets are properly titled to match your disposition plan. Don’t automatically assume they currently are. Circumstances change over time, and it’s vital that you confirm the property titling and that beneficiary designations fit your estate planning documents. Your advisor is happy to walk you through these steps to determine if changes are warranted.