How Property is Titled Determines How it is Transferred at Death
A critical step in the development of an estate plan for a particular client is to determine how each client holds title to their assets. The answer to this question will significantly impact how assets are transferred at death and what liabilities those assets will be exposed too. Such liabilities may include income, capital gain and estate tax exposure and the claims of various creditors.
Assets that are considered part of a person’s probate or testamentary estate are transferred at death according to a person’s last will and testament under the supervision of a court of competent jurisdiction. In the absence of a last will, assets subject to probate are transferred according to state intestate statutes. Examples of probate assets include tangible personal property (i.e. furniture, automobiles, etc.), real estate, stocks, bonds, mutual funds and cash on hand. The probate process helps ensure that an estate is properly distributed to a decedent’s heirs, beneficiaries and creditors holding a claim against the estate.
The probate process is somewhat slow and cumbersome, can be expensive and lacks privacy because it occurs within the public domain. The following assets typically avoid probate and therefore are not controlled by a person’s last will and testament:
Assets held in Trust with Named Beneficiaries- (e.g., a “Revocable Living Trust” based estate plan with beneficiary designations);
Assets held in Joint Tenancy with Rights of Survivorship- (e.g., jointly held bank accounts or brokerage accounts with a “Right of Survivorship” designation placed on the account; real estate held by a married couple or two or more individuals as joint tenants with a Right of Survivorship Designation);
Assets with Beneficiary Designations- (e.g., life insurance death benefits; IRAs; 401(k)s; and annuities); and
Assets Payable on Death (POD) or Transfer on Death (TOD) Designations- (e.g., certain bank or brokerage accounts set up with POD or TOD designations assigned to the account).
The important thing to remember is that assets held in the above form will not pass by a person’s last will and testament. So for example, if you own an IRA with a beneficiary designation other than your spouse or domestic partner, say your brother or sister, and your intent was to give everything to your spouse or partner by way of your last will, unfortunately your spouse or partner will not receive the IRA. Your IRA will transfer to your brother or sister whomever is the named beneficiary. As you can see, coordinating how you hold title to your property and who you designate as beneficiaries upon death becomes extremely important to avoid unwanted outcomes.
Assets that pass under the terms of a last will and testament are those which are included in person’s probate estate and therefore subject to the probate process. There are two main categories:
Assets held in Fee Simple Ownership- if you hold assets in Fee Simple you are considered the sole and absolute owner. These assets become part of your probate estate upon your death and are controlled by your last will if you have one and if not by state intestate statutes.
Assets held by Tenants in Common- pertains to ownership by two or more persons without Rights of Survivorship. Note that a right of survivorship means that when property is owned by two or more persons and one dies, the others take that deceased persons share. This automatically occurs by operation of law at the time of death of the joint owner. In most states, property owned by two or more persons without a right of survivorship is considered to be held by the parties as Tenants in Common. Each owns a fractional interest in the property but is entitled to enjoy the whole. Each Tenant in Common absolutely owns their fractional share in the property and can sell it or give it away during their lifetime or leave it to a beneficiary upon their death. When a joint owner dies his or her fractional interest becomes part of their probate estate and is passed by their last will or state statute (in the absence of a will).
Most people are not clear on how their assets are titled and the legal significance of each form of ownership. Legal significance in terms of protecting those assets during your life and ensuring that they are transferred to the appropriate beneficiaries at your death. Understanding how your property is titled and what will become of it upon your death is critical to ensure that what you expect to happen upon your death will in fact happen. The Perna Law Firm stands ready to help. Call for a free consultation today and let us help you better protect you and your family.