Dear First Mates,
Hello everyone! I hope this email finds you well and in good spirits. I have recently conducted a client beneficiary review to ensure I have the correct beneficiaries on file. So, for this month, I’d like to go through five primary ways you can transfer assets to your loved ones. This is extremely important to understand because of the many real-life horror stories that could have been averted with some simple planning.
Intestacy
If you die without creating a will, you are considered to die intestate. Your assets will transfer to your beneficiaries based on the laws of your state. This is the least desirable outcome since your wishes may not be followed due to a lack of planning. For example, the law says that New York State becomes your beneficiary if you die intestate with no family. The nerve!!
Probate
Probate refers to the legal process in which a will is deemed valid and authentic by a judge. It can also refer to the general administering of a deceased person’s estate if they didn’t create a will. The executor (or administrator if there’s no will) is appointed by the court to administer the process where an inventory of everything you own is filed with the court and becomes public information. During this process, any remaining debts are settled, and assets are distributed to named beneficiaries found in the will.
The major drawbacks of the probate process include the costs associated with it, the length of time it takes to complete, and the fact that your private information now becomes publicly available. Predators can use this time to target grieving family members, so please be aware and on high alert. Finally, it is possible for someone to challenge (or contest) the will. The joke is that where there is a will, there are 500 relatives.
Operation of Law
It is common for certain assets—such as a home, bank, or brokerage account—to be owned jointly by two or more people. This is called Joint with Rights of Survivorship (“JTWROS”). This type of ownership states that the assets will automatically transfer to the surviving owner(s) when one owner passes. Please note that assets transferring through the operation of law supersede the will.
Trust
A trust is a legal vehicle created by an individual (known as the grantor or settlor) that allows a third party, known as the trustee, to hold and direct assets in the trust on behalf of the grantor’s beneficiaries. There are many benefits to using a trust, including avoiding probate, privacy, as a tax shelter, and asset protection. Why would you need to protect assets? Typically, you want asset protection against creditors, lawsuits, divorce, or even from the beneficiaries themselves.
Trusts are extremely flexible in that you can dictate the terms of an inheritance in both life and death. This is especially true where the beneficiary is underage, disabled, or incapable of wisely managing their finances. A big mistake is to create a trust with a competent estate planning attorney – only to never fund the trust with specific investments.
Contract (Beneficiary Designations)
Fortunately, many types of property can avoid the probate process altogether by contract law. This is where you name beneficiaries on specific accounts. Consider naming both primary and contingent beneficiaries in case anything happens to the primary beneficiaries and the accounts are never updated (or in the event of a simultaneous death). You can name beneficiaries on:
-Bank accounts via Payable on death arrangements
-Brokerage accounts via Transfer on death arrangements
-Retirement plans (401k’s, 403b’s, IRA’s, etc)
-529 Plans
-Life insurance contracts
-Annuity contracts
Please note that named beneficiaries supersede whoever you list in a will or trust. For example, let’s say you have a Traditional IRA worth $500,000. You established this account many years ago and named your former spouse as 100% primary beneficiary. After getting remarried (G-d bless you), you update your will to name your current spouse but fail to update the IRA beneficiary. Once you pass on, your ex will get the money, and there is little your current spouse can do about it. This unfortunate scenario happens many times.
In summary, consider reviewing and updating your beneficiaries annually and, at the very least, after a major life event. Do not assume the beneficiaries on your different accounts are correct. Call the custodian or bank and ensure you can view who is listed online or via official documentation, as mistakes can and do happen.
Dave’s Picks
The Temper Trap – Sweet Disposition (Official Video)
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