I keep having this same conversation with clients about how essential account registrations are when you consider estate planning. Maybe some clarification and examples will help.
If you intend to split your estate evenly between your four children, have you accomplished that? Many individuals think if they said that in their will, they achieved that. You should consider that the will is the document of “last resort.” If there is no named beneficiary and the account is not titled directly to another person, the will comes into play.
If you name a beneficiary(ies), this asset transfers directly to that individual. What the will says would not matter. Employer plans such as 401(k)s, 403(b)s, 457, deferred compensation, Simple and SEP IRAs, Keoghs, and profit-sharing all have the opportunity to name whom you would like to receive the proceeds at your death. The same is true with Traditional and Roth IRAs. Life insurance policies will request beneficiaries. If you create a trust, there is a place to name beneficiaries.
Again, if you name a beneficiary, what your will says does not matter. Many individuals update their will after a divorce but forget to update beneficiaries on an investment account. The ex-husband or ex-wife ends up with the life insurance proceeds or employer retirement plan rather than your current spouse.
If you have a change in marital status, it is recommended that you carefully review all accounts and the named beneficiaries. You may not want your parents getting funds instead of your new spouse. You want to make sure when you get divorced that all accounts have the beneficiaries changed. You may want to consider if you need to make changes when you have a child or grandchild or if one passes away.
Why not just let your estate, therefore your will, be the beneficiary of all your accounts? This may increase the taxes being paid since estate tax rates increase quicker than individual rates. It will force liquidation of retirement accounts all in one year rather than liquidating them over multiple years and allowing the tax payments to be spread out. The legal fees may be higher due to additional work required by the attorneys settling your estate.
We see individuals go to the expense of creating a trust – either revocable or irrevocable and then not put anything in the trust. The account registration needs to be changed. You need to go to the bank or the financial institution and fill out the paperwork to have the name changed on the account to say “The Harrison Family Trust” or whatever the legal name of your trust is. If that is not how the account is registered, the account is not a trust asset.
The accounts with a trust name designated are the only accounts that will pass to the beneficiaries listed within the trust document. If you are trying to avoid probate with a revocable trust or avoid probate and protect assets with an irrevocable trust, you can only do that by making sure the assets you want in the trust are retitled to the trust. Any accounts or assets titled with the trust account registration will be distributed to the beneficiaries named in the trust. The will would not come into play when determining how these are disbursed.
The account registration that we often see having the most un-intentional impact is the joint registration. Spouses having a joint registration makes sense since you often want to leave whatever is in the account to the surviving spouse. What happens when the first spouse passes away? Too often, we see the remaining spouse add a child onto the account as a joint owner.
Whenever another person is listed as jointly owning the account, the account belongs to the surviving owner. By adding one child as a joint owner, whatever remains in the account at the time of your death belongs to that child. You have created a situation where you are not leaving your assets to all your children equally.
Adding a child to an account can have other negative impacts. That asset is now considered ½ theirs. Creditors may attach it if that child gets in financial trouble. The asset may be contested during a divorce situation. Litigators may attach the account as the child’s account during a lawsuit situation. Financial aid officers may consider this an asset and reduce college financial aid as a result.
We are in complete agreement that having someone else have access to your bank account “just in case” makes sense. This can be accomplished using a power of attorney rather than making them a joint owner. A power of attorney gives them the ability to conduct transactions within the account without giving them ownership.
Bank accounts – checking, savings, certificates of deposits, etc., use the designation of POD, payable on death. Some institutions use “in trust for” to have the same impact as the POD. This means the account belongs to you now. The account will pass directly to the name(s) listed in the POD when you pass away.
Non-retirement accounts such as individual stocks or mutual funds can have the designation of TOD, transfer on death, to them. This means the investments directly pass to the individuals named rather than passing via the will.
To this point, you have the potential of naming beneficiaries or adding designations to the account registrations, and what is in your will has yet to matter. You have avoided the need to probate any assets. Death certificates would be presented at each of the institutions, and funds will pass directly.
If you have assets that must pass via your will, the will must be probated. Once probated, assets will pass into your estate and then be settled out of the estate via the directives in your will.
The assets that most often cause the need for probate are when real estate is owned. To avoid the need for probating of real estate, you can place real estate into a trust. This can be a significant cost-saving move if you own real estate in more than one state. If you own real estate both in NY and FLA, your will would be required to be probated in both states, increasing the attorney fees.
A 2nd method to avoid probating real estate is to transfer the deed into your children or other beneficiaries’ names. Many add a life use designation to ensure they can stay in the house while living, and the house receives a stepped-up basis at the time of death. With this change to the deed, the house avoids going through probate, and you could potentially avoid the cost of probate altogether. Like making the child joint on your bank account, it can have similar concerns with creditors, lawsuits, and the case of the divorce. We view the trust as a better option.
The probating of assets can be helpful in some situations. For many avoiding the delay and expense of having to go through probate makes more sense. If you want assistance in ensuring that your account registrations and beneficiary designations will achieve your desired outcome, please reach out to us.