Every adult should have a will regardless of age, marital status, or net worth. This is a document that appoints the right people to make sure your wishes are accomplished and your assets pass to those you care about. However, many people don’t realize that the way in which an asset is titled is just as important as the document itself. The first step in estate planning is knowing how your assets are owned so property passes in the manner you desire. When assets are not titled properly, you may unintentionally disinherit your loved ones.
There are three ways you can pass an asset at your death:
NO. 1: THROUGH PROBATE
Probate is the term used to describe the system by which every state that you own property in administers the passing of such assets to your heirs. Issues with the probate system include additional costs and fees, delays and publicity. What assets pass through your Will is often misunderstood.
Only individually owned assets pass through probate. If you are married and you predecease your spouse, you might be surprised to learn how few individually held assets you own.
Revocable Living Trusts (RLTs) can be used to avoid the probate system; however, you have to transfer the assets to the RLT to accomplish this. You should talk to your advisor to determine whether an RLT is appropriate for you and your family.
NO. 2: BY OPERATION OF LAW
Passing assets by operation of law applies primarily to jointly held assets. If you buy your home while you are married, your real estate agent should make sure that the property is titled Tenants by the Entirety (TbyE). This is the strongest form of joint tenancy and can only be held between spouses where the surviving spouse, by operation of law, becomes a 100% owner at the first spouse’s passing.
You can also own property Joint Tenancy with the Right of Survivorship (JWTRS) where your interest in the asset passes to the other holder at your death. This type of joint tenancy is common among spouses and recommended when non-spouses own assets together where the goal is for the survivor to inherit the entire asset.
It is important to understand the distinction between the two types of joint tenancy discussed above and Tenants in Common (TIC). TIC refers to an asset that is owned by multiple individuals but at one’s death, the goal is for that interest in the asset to pass to someone other than the other joint owner. For example, if my friend and I buy an investment property 50/50, but at my death I want to pass my 50% interest to my wife, the proper titling would be TIC. This is considered an individually held asset so it would pass through probate (where I have designated my wife as my heir through my Will), not by operation of law.
NO. 3: THROUGH A CONTRACT
The third way you can pass an asset is through a contract. Common examples are life insurance, annuities, IRAs and your 401(k) at work. In each case, you as the owner of the asset has designated a primary beneficiary who receives the asset at your passing.
I can write in my Will that I want all of my assets to go to my wife at my death, but if the beneficiary designation on any of these assets says otherwise, then I will be disinheriting my wife. This is extremely important if you are recently married and still have Mom and/or Dad as the beneficiaries of your 401(k). Or, if you are in a second or third marriage and have not updated your beneficiary designations since getting divorced.
Please make sure that you are reviewing how your assets are titled when discussing with your advisor the best estate plan for you and your family.
DISCLAIMER: Securities offered through Triad Advisors, Member FINRA/SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. Christophe P. Dionot, J.D.