There are a variety of reasons to create or review your estate plan. We’ve discussed some of these in the past (like here and here). Among the benefits of thoughtful estate planning is the reduction of administrative burdens on heirs. Today, we’ll look at some of the technicalities around the transfer of assets from decedents to heirs.
The Basics
- Property passes to heirs through three channels: by contract, by will, or through intestacy.
- Examples of “by contract” instruments include insurance policies, retirement plans, and trusts (we’ll dig deeper later in this post).
- A will covers personal property and assets that can’t be transferred by contract (think: cars, silverware, checking accounts, furniture, etc.)
- When an individual dies without a will in place, they are “intestate,” and the distribution of their assets is subject to the laws of their state of residence. Intestacy also applies to assets that can’t pass via contract and are not included in the will.
What about Probate?
Whether assets pass to heirs via your will or intestate, they will need to go through probate. Probate is the process of administering estate assets through court. Generally, the court determines the validity of the will (if it exists), appoints an executor/executrix, and oversees the administration of the estate. This process ensures the orderly settling of an estate. However, probate can be costly and time consuming. Furthermore, and perhaps most importantly, matters of probate are public record. Not everyone is amenable to a public record of their assets and liabilities. For these reasons, many individuals and families are inclined to avoid probate, at least to the extent possible.
How does this apply to me?
Setting up an estate plan so that most assets pass via contract reduces (or eliminates) the likelihood of probate. There are several means to this end – each with unique considerations. Here are a few examples:
Joint Accounts: In the case of the death of a joint account holder, assets will generally transfer (automatically) to the surviving joint owner.
Transfer on Death Accounts: Some financial accounts allow for the explicit designation of beneficiaries. These “Transfer on Death” (TOD) accounts pass directly from decedent to beneficiary. Usually, the beneficiaries need only to present a death certificate to initiate a change in ownership.
Retirement Account Beneficiaries: Retirement accounts such as your 401(k) or individual retirement account (IRA) allow the designation of beneficiaries. As is the case with TOD accounts, a retirement account’s beneficiary enjoys a relatively simple administrative burden.
Trusts: Trusts are among the most flexible and customizable means of transferring your assets after death. There are several types of trusts to consider. Many such trusts bypass probate if established and funded during one’s lifetime. Trusts not only allow for the naming of beneficiaries, but can also dictate how the assets are treated and when the assets are distributed upon the grantor’s death. You can decide if beneficiaries have access to interest or principal, at what age beneficiaries receive assets, or for what purpose assets can be tapped. The trust can be funded with anything from checking and savings accounts to real estate and brokerage accounts. Not all trusts are equal, though, and should be considered with the input of a legal professional.
The Bottom Line
Determining the extent to which probate should be avoided – and determining the means to that end – are different for each family and individual. Personal preferences, taxes, state law, and family dynamics may all come into play. While all of the above elements may be suitable for some individuals, they may be irrelevant for others.
As always, we suggest reaching out to your estate planning attorney. Don’t have one? Your financial advisor may be able to suggest a qualified attorney whose expertise matches your needs. Often, your advisor and estate planning attorney can work as a team to help you craft your plan.