Many things about estate planning are complex, but the number one mistake people make is actually quite simple, perhaps so simple that it is often overlooked. It is coordinating the title of assets with the plan.
Over years of meeting with clients and settling estates, it was consistently alarming how often the assets did not seem coordinated with the plan, sometimes to disastrous results. This is perhaps also a contributing reason that many estate planning attorneys I talk to spend as much or more time handling family settlements after death than they do actually planning. With all the complexities of property law and tax law, the fiduciary responsibilities and choice of executor and trustee, and investment management, having the root of the plan disconnected by a gap in titling is unfortunate.
For example, let’s say Nancy writes a will. She thoughtfully details who gets what, and has her attorney draft the document. Her estate is to pass equally to her three daughters. Everything is in place, and she reviews the document every year. After her husband dies, she realizes she wants someone to be able to access her money should she be unable to, so she adds one of her responsible daughters, who lives nearby, to the accounts as a joint owner, enabling her to write a check or access funds if needed.
When Nancy dies, all her liquid accounts go to that daughter, rather than be distributed equally as stated in her will. Why? Because joint accounts do not pass by the terms of the will.
Active Life, Incapacitation, and Death
There are three distinct periods in a person’s life: Active Life, Incapacitation, and Death. One’s account title should coordinate with their plan documents in each of these three periods. And yet, I find most people set it up with only Active Life in mind; that is, who controls and can access funds right now.
This focus on present control is sometimes at odds with the later periods. The good news is the problem is easily corrected. Professionals should include title of property in their client reviews to ensure it remains accurate.
Forms of Ownership
We all know the forms of ownership, but often overlook their estate planning implications. This is not intended to be an in-depth review, but rather a summary of key estate planning implications of each form of ownership.
Individual Ownership: When only one person is on the account, the account passes by the terms of the will, passing through probate.
Joint Tenancy: If multiple people are named as joint tenants, there is a “right of survivorship,” which causes the property to pass directly to the surviving joint tenant(s). It does not pass by terms of the will nor trust avoiding probate.
Tenancy by the Entirety: This is basically joint tenancy between spouses. Again, property owned as such passes directly to the surviving spouse, bypassing the terms of the will and trust and probate.
Tenancy in Common: This also involves multiple owners and is therefore sometimes confused with Joint Tenancy, creating misnomers like “Joint Tenancy in Common.” There is no such thing, but some state courts have had to rule on the issue when assets were mis-titled as such. Tenancy in Common creates a fractional share ownership that does not have rights of survivorship and thus passes as the decedent’s portion is owned, generally in their individual name, and thus under the terms of the will and probate.
Community Property: This is basically Tenants in Common between spouses. For the nine states where community property is the law of the land, community property is imposed, whether titled as such or not, on any property earned during the marriage. It sometimes causes confusion or dispute when pre- and post- marital property is mixed. The decedent’s portion of community property passes in accordance with their will. To attempt to avoid probate on community property, some states have created community property with rights of survivorship, to pass directly to the surviving spouse.
Beneficiary Designation: Some assets pass by contact in which they are permitted to name a beneficiary. Examples include life insurance, annuities, retirement plans and IRAs, and “payable on death” forms of ownership. When a valid beneficiary is named, the property passes directly, superseding the will and trust, and avoiding probate.
Trust Property: Property held in a trust passes by the terms of the trust, again bypassing the will and probate. Creating a trust is not enough; the assets need to be re-titled in the name of the trust. Community property can be held in a trust and still retain its character as community property.
Other forms of title include ownership by a corporation or partnership, but what’s most important is how the shares of the corporation or interests in the partnership are titled.
Another misunderstood feature of titling is whether assets pass through probate. Probate means “proof” and is the process of proving the wishes of the decedent by validating his will. Many think probate applies only to intestate estates, where there is no valid will, but in fact everything passing under the terms of the will goes through probate.
So, there we have it, a quick summary of key features of the various forms of ownership and their characteristics at the death of an owner. Aligning the forms of ownership with the estate plan, and keeping it properly aligned, is crucial to ensuring that your client’s wishes are carried out as intended at death. Explain to your clients that reviewing forms of property ownership and their alignment with the plan is part of your annual review process to help them avoid this common estate planning mistake.
If you need assistance helping your clients through the estate planning process, Trucendent’s network of independent estate planning attorneys can help, while keeping you at the center of the client relationship. Click here to learn more.