The Asset Ownership Issue
Your estate consists of everything you own. This includes real property (houses and land), tangible personal property
(furniture, jewelry, and automobiles), and intangible personal property (stocks, bonds, and bank accounts). The estate
also may include proceeds of life insurance policies and death benefits under retirement or pension plans.
planning it’s important to understand how property passes at death based on the ownership and titling of your assets.
people take how they own their assets for granted; married people put everything in joint names and single persons own assets
either in their individual names or in joint names with an adult child or parent. Proper asset ownership is essential
to an estate plan that works.
Here are Examples Asset Ownership that Causes an Estate Plan to Fail:
Assets in your individual
name will likely go through probate when you die. If probate avoidance is a goal, your plan will fail if you own assets,
e.g., your home, in your individual name.
Your Will only controls assets in your individual name, no matter
what your will states. This means that it will not control any assets you own in joint tenancy with someone else, won’t
control assets titled in a trust, and won’t control assets that have a specific beneficiary designation. If your
goal is to have your will control any of these assets, your estate plan will fail.
Your trust (and your successor
trustee) will only control assets in the name of your trust. Your plan will fail unless your assets are properly titled.
With a trust-based plan, special attention must be paid to assets such as life insurance, retirement accounts (e.g.,
IRAs, 401(k)s, etc.) and annuities. Making the wrong beneficiary designation could expose these assets to avoidable
taxes and unintended distributions.
Here are Examples of Asset Ownership that Work:
If you have a living trust, fund your assets into
the trust. This means changing the title on non-retirement assets to the name of your trust; and, depending on your
circumstances, possibly changing the beneficiary on beneficiary designation assets to the name of your trust. An experienced,
qualified estate planning attorney can guide you with these decisions.
If you have a will (and no trust), it’s
likely in your best interest to own assets in your individual name. Joint tenancy ownership, though common, has many
Different Types of Asset Ownership
Property can be owned in many different ways. It might be helpful to think of the different types of ownership as follows:
Single Ownership Property
This is when a person holds title to an asset (a bank account, for instance) in his or her sole name. The person can
do whatever they want to do with the property. Their Will controls what happens to the property when they die.
Beneficiary Designation Property
This is property that is owned by one person and that passes at death not by will but by beneficiary designation. Property
that passes by beneficiary designation includes life insurance and annuities, IRAs, 401(k) plans and many types of employment
benefits, such as stock options and deferred compensation. If no beneficiary designation is completed, or if it is invalid
for any reason, the property passes under the person’s will.
Co-ownership can take the following forms:
- Joint Tenancy – Each party owns equal shares and has
the right to alienate (transfer the ownership of their interest/share).
- Tenancy by the Entirety – Each
party owns equal shares but neither tenant has the right of alienation without the consent of the other. Property owned
by “husband & wife” generally falls into this category. When a tenant by the entirety dies, the surviving
spouse receives the deceased spouse's interest/ownership. However, the property cannot be taken to satisfy one spouse’s
debts until the other (non-debtor) spouse dies.
- Tenancy in Common – Tenants in common may hold unequal
interests, and they may acquire their interests from different instruments. Each party has the right to alienate.
of Survivorship – Some property that is co-owned with another person cannot be separately disposed of at death;
rather, the deceased co-owner’s interest passes automatically to the other co-owner. This property is commonly
known as joint tenancy with right of survivorship (JTWROS). It is similar to Tenancy by the Entirety except that is
it not protected from the co-owner’s debts.
Certain states are Community Property states, which means generally that any property acquired through a person’s earnings
while that person is married is owned one-half by that person and one-half by his or her spouse. This is true even if
the property is owned in one spouse’s name only. Property acquired before the marriage, or by gift even during
the marriage, is typically referred to as “separate property.” Community property can be converted to separate
property, and vice versa, by using a community property agreement signed by both spouses.
A trust is a legal arrangement involving three parties:
- The person creating the trust (known as the grantor),
trustee (who owns legal title to the property), and
- The person for whom the trust is administered (known as the beneficiary).
The grantor gives legal title of assets to the trustee, who in turn agrees to administer and ultimately dispose of the
property for the benefit of the beneficiary in accordance with the terms of the trust agreement. In the case of Revocable
Living Trusts, the grantor is often both the trustee and the beneficiary. In other words, the grantor gives property
to himself or herself as trustee and agrees to administer it for his or her own benefit as beneficiary.
However, a trust
agreement operates only over those assets held in the name of the trustee. So if a grantor creates a trust but fails
to transfer assets to it (known as “funding the trust”), it may not work as it was intended.
Power of Appointment Property
One final (and usually minor) category also involves trusts. Many trust agreements give a beneficiary a “power
of appointment,” which allows that beneficiary to circumvent the trust terms by appointing certain trust property to
a pool of possible additionalbeneficiaries.
How Property Passes at Death
At death, a person's property (assets) is transferred to new owners either as a non-probate transfer or as a probate transfer.
In a non-probate transfer, property passes to the new owner(s) because of the way the property is titled or the designated
beneficiary. In a probate transfer, the decedent's property passes to specific individuals based on their Will, or according
to inheritance laws if the decedent had no will.
Non-probate assets generally fall into three categories: those which are transferred by title, by contract, or by trust:
Assets transferred by title include property held in joint tenancy with right of survivorship, such as a house, car, or bank
account, or bank accounts payable on death to a named individual. Note that co-ownership property owned as a joint tenancy
or tenancy in common has no rights of survivorship and is probate property.
Assets transferred by contract include life insurance policies, pension and retirement plans, and any other asset in which
the owner names the beneficiary to receive it upon the owner's death. These fall under the “beneficiary designation
property” described earlier.
Trust: If the decedent has created and funded a
trust, the trust will generally contain provisions regarding transfer of the assets at the time of death. These assets
fall under the “trust property” ownership described earlier.
Title to these non-probate assets passes automatically at death without any court proceeding. Even if a person has arranged
for non-probate transfer of ownership through title, contract, or trust, this does not mean that a Will is unnecessary. A
Will still may be needed to distribute probate assets, deal with situations when the joint owner or beneficiary dies, determine
who will handle the business affairs of the estate, etc.
Probate is a court proceeding to determine who should receive an individual's property at death, who should handle the business
affairs of the decedent, and who should care for the decedent's minor children (if any) and their property. If a person
prepares and executes a Will, they are considered “testate”, and their Will governs probate decisions. With
a valid Will, a person can, within certain limits, distribute their assets to anyone they desire.
The two exceptions or limitations are as follows:
- A husband or wife cannot disinherit the other, as a spouse
has a statutory right to a share of the estate. The exception is if the spouses have executed a valid marital agreement.
parent cannot disinherit a minor child for whom the parent has an ongoing support obligation. Adult children may be
omitted as they have no legal right to receive an inheritance from their parents.
A person is not obligated to leave property to family members, other than the two exceptions above. Some people leave
assets to friends and distant relations. Others make charitable gifts to organizations they wish to support.
The Wills & Trusts page of this Estate Planning section discussed your need to establish Living and Credit Shelter trusts.
This section described the various types of asset ownership and how your assets are transferred at death. This is so
that you can properly title your assets and beneficiaries.
In summary, to assure that your estate is handled the way you want it to be (in your absence), you need to follow
- Transfer the majority of your assets into your Revocable Joint (Living ) Trust, including bank accounts,
brokerage accounts, real estate, loans, etc.
- Title your life insurance policies with the trust named as the primary
- Title your individually owned qualified (pre-tax) assets with your spouse as the primary beneficiary
and the Living Trust as your secondary beneficiary. These include IRA;s, 401(k)’s, 403(b)’s, qualified annuities,
etc. You may alternatively wish to consider naming one or more individuals as secondary beneficiaries of your IRA(s) in order
to "stretch" the payouts over the life expectancy of the oldest beneficiary.