A Will Review Is Not Enough

By Nick R. Taylor

 

A regular review of your will or living trust is essential (see separate article in this newsletter), but is not enough to be sure your estate will be distributed the way you desire and at the least possible tax cost. You must also review regularly how your assets are titled and what provisions you have made in any beneficiary designations. To do this, it is essential to understand how assets actually pass at time of death.

 

In the event of a death, assets pass essentially by three different methods:  1) joint tenancy titles, 2) beneficiary designations, and 3) the terms of an individual’s will or living trust. Assets held in joint tenancy pass automatically at the death of one person to the other living person or persons named on the title. For example, assume an individual dies with a will providing that all his or her assets pass equally to the three children. If the decedent owned a bank CD, or any other asset, in joint tenancy title with one child alone, that child alone receives the entire CD.

 

Many assets pass because of the beneficiary designation. This is common for life insurance, retirement benefit plans and annuities. The beneficiary designation will control. For example, assume an individual dies with an older life insurance policy which had only the first two born children out of three children named as beneficiaries on the policy. The insurance policy will pass directly to the two children, not to all three. Another common problem is an old life insurance policy that actually designates a deceased parent of the insured.

 

After joint tenancy titles and beneficiary designations have distributed property according to their terms, then the deceased individual’s will or living trust takes effect. In simplest terms, a will controls those assets that are held in an individual’s name alone with no beneficiary designation. A living trust does not automatically control any assets. In order for the living trust to permit an asset to avoid probate, the asset must have either been titled in the name of the trust or payable to it at the death of the creator of the trust. We find many individuals have living trusts but have not in fact fully funded them or not even funded them at all. In such case, the individual’s estate will be subject to the full probate even though there is a living trust that could have been properly funded with assets and avoided probate entirely.

 

Proper titling of assets is also essential to assure that any estate tax planning is carried out. An individual can have a very good will or trust, but assets titled jointly or with beneficiary designations inconsistent with the estate documents can result in sizable unnecessary estate taxes.

 

Please carefully review asset titles and beneficiary designations on a regular basis or review this information regularly with your estate planning advisor.

 

 

 

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