What does a will do? Your last will and testament states who you want to manage your final affairs and how specific assets will be distributed. Whether the will determines how an asset is distributed and if it is part of your estate is determined by how the asset is titled, owned, and if there are any beneficiaries named.
The titling of assets – is there someone else whose name appears on that account? A bank account that is held jointly (JTWROS) belongs to the remaining account holder. Those dollars do not go into the estate account. A joint investment account between you and your spouse belongs to whoever outlives the other.
We are concerned when we learn that a client wants to equally split all their assets among the children, yet only one child’s name is joint on the bank account. For example, if there is $50,000 in that bank account and your death occurs, those funds now belong to your son, Sam. While your intention was for Sam to split these funds with his sisters Vicki and Jill, he does not have a legal requirement to do so. Sam gets to walk into the bank, request that money, and do what he wants with it.
Often an individual wants to add someone else on the bank account to help with banking. This is where the power of attorney we talked about in the last post can be used. It would give Sam the ability to do banking transactions for you, but the funds do not belong to him. Upon your death, the funds go into the estate to help pay final expenses and be distributed via the terms of the will. Make sure that making someone joint on an account does not have unintended consequences.
We often recommend individuals add a transfer on death (TOD) or payable on death (POD) option to a bank account or an investment account. This is sometimes also known as “in trust for”. Adding this designation on an account is similar to adding a beneficiary. It does not give that person any rights to what is in the account today. It does say at your death, the individual(s) can present a death certificate and the funds will be disbursed to them. This avoids the need to wait until the will and estate is settled for proceeds to be disbursed.
We see individuals re-title the deed to their real estate into the names of their children. This is often a protective move to ensure the house is not lost to paying for long-term care expenses. Most often, there is a life use option retained by the original owner giving them the right to stay in the house until their death. This allows the recipient to easily inherit the house.
Selling a house before the original owner’s death can create a tax issue. It could potentially create an issue if the child were to have credit issues or possibly be problematic in the case of a child’s divorce. It could potentially create an issue if you want to use the house as collateral to borrow against since you no longer own it. If you were to sell the house before your death, the proceeds belong to the child(ren) and may create financial issues if you need the funds to move elsewhere. There are pros and cons to this re-titling. You need to make sure that you understand all the concerns before deciding to re-title the deed.
Most often, the titling of assets supersedes what you put in a will. Make sure you are achieving the desired result when you are re-titling assets. The same is true when you name a beneficiary. If an asset has a beneficiary named, that asset becomes the beneficiary’s property at your death. Retirement accounts such as 401(k)s, 403(b)s, 457, tax-deferred savings plans, profit-sharing plans, pension plans, and other employer retirement plans allow you to name beneficiaries. IRA accounts, both Roth and Traditional IRAs, have beneficiary designations. Life insurance and annuities will have you name beneficiaries for these accounts.
The key with beneficiaries is to make sure you keep them up to date. Beneficiaries should be reviewed on all accounts at least annually. You need to consider if you need to change beneficiaries if you have a life-changing event such as marriage or divorce. Has there been a death of someone that you named as a beneficiary? Has there been a birth and you want to add a child or grandchild as a beneficiary? A parent going into a long-term care facility might mean that you no longer want to designate them as a beneficiary. Do you have a concern about a spendthrift child and may not want to make them a beneficiary? Maybe you want to create a trust and the trust will become the beneficiary to protect spending for a spendthrift child, a special needs child, or a minor child.
Making a non-person the beneficiary – such as a trust or estate can create a tax problem. Most often, if the estate or trust is a beneficiary, it means immediate liquidation of the entire account instead of taking distributions over multiple years. An IRA with a small balance may not be cause for concern. An IRA with significant dollars may cause higher taxes if it is required to be all distributed in one year.
When someone dies, you need to review the titling of accounts and beneficiaries. Those assets and accounts pass outside the estate. The related individuals must present death certificates and request their share if they are named a beneficiary or named as part of a TOD or POD designation. A joint owner can liquidate an account and do what they want with the assets. All assets that do not pass via a beneficiary or by the titling of the account become part of the estate. Whatever your will states is how these assets will pass.
First, before anything can happen, the will needs to be probated and verified. The process of probate is submitting the will to NYS, who certifies it is the last will that was created and allows for the appointment of an executor (male) or executrix (female). This is the person who now carries out the wishes within your will. Most individuals get an attorney involved to help them through the probate process. This is not a requirement, but due to the unfamiliarity of this process, it is recommended.
The executor(trix) will be the person who makes sure that your final expenses are paid. This is the person who will make sure your assets are distributed per the wishes in your will. The executor(trix) is only in charge of what passes through the will and is part of the estate.
The executor(trix) is required to distribute assets based on what your will says. After all your final bills and expenses are paid, any remaining assets are distributed. Investment accounts can be liquidated and cash given to the beneficiaries or the account can pass the holdings. For example, consider if there are 300 shares of XYZ stocks. The executor(trix) can sell the shares and distribute the cash. The executor(trix) can give each of the three beneficiaries 100 shares of XYZ stock. Each beneficiary gets to choose then to sell the stock now or hold onto the stock.
The executor(trix) is responsible for ensuring the assets are distributed based on what the will says. The executor(trix) cannot decide to give specific assets to some individuals and other assets to someone else unless that is what the will allows. Potentially, if all beneficiaries agree, you could give all the shares of XYZ to one beneficiary and all the share of ABC to a 2nd beneficiary if they are of equal value and everyone agrees. We do not recommend selling some shares and distributing cash to some beneficiaries while distributing shares of stock to another beneficiary. This can create unfair tax implications for some beneficiaries within the estate.
What happens if you do not have a will? Each state has rules and regulations that must be followed as to how your assets will be distributed. An administrator’s role is close to that of the executor. Your assets may be distributed among parents, spouse, children, siblings, aunts, and uncles, cousins, nieces, and nephews – ones that you like, ones that you may not like, ones that you barely know. Is this what you want to happen? Having a will in place means you get to make those decisions of where your possessions go.
Within that will, you also name one or more guardians for your minor children. You can name the person(s) who will care for your children. You can elect to name one individual who provides both the physical care and the financial support. You can also elect to separate those responsibilities among different individuals. If you do not name guardians, it becomes the courts’ responsibility to determine who will raise your children. Is this really what you want?
Finally, as part of estate planning, it may be suggested that you create a trust. Trusts are created for a variety of reasons. A trust may be for protecting assets for long-term care purposes. Certain types of trusts allow the assets not to be included in your estate and reduce future estate taxes. They can protect for a special needs child to make sure they do not lose services. Trusts are sometimes created to limit access to funds if there is a concern about a child spending an inheritance too quickly or because a child is a minor at the time of inheritance. A trust can be created to avoid having to go through an expensive probate process if assets are held in multiple states or countries. There are many reasons to justify the creation of a trust. Working with a financial planner, tax preparer, and an estate planning attorney can help determine if a trust is recommended for your situation. We will discuss trusts more in-depth in a later post.
We are aware that for many dealing with their own mortality can be emotional. We also know it is better to go through this process ahead of time and plan than to force others to deal with it while grieving. Once you have completed the process, we recommend that you revisit your documents occasionally to consider changes to your situation and changes that may have occurred in the estate rules and regulations.