Investing for the rest of us – how property passes on death
Death, taxes and teenage texting – these are the certainties of life. The tax code is too complicated for anyone to understand, and why teenagers can text all day but never write a thank you note is an unsolved mystery.
Death on the other hand is a bit more straightforward. One day you are reading a newspaper and the next day you are in it. Let’s take a look at what happens to your property once everyone knows where to send the flowers.
First, and surprisingly to a number of people, most of your estate probably won’t end up in probate court. Only what passes will pass the process. If you don’t have a will, don’t worry, the state has one for you. Of course, the state has never welcomed you and doesn’t know how you want things distributed, but whose fault is it? Dying without a will is called intestate. You don’t want to die without a will. Go to an estate planning attorney and heal yourself.
Once we’ve decided that, here’s how ownership passes.
Life insurance and annuities
Death benefits are paid to named beneficiaries. Unless you name your estate as a beneficiary, death benefits will escape probate. It’s generally not a good idea to name your estate as a beneficiary. One reason is that the assets in your estate are available to creditors. Benefits also flow more slowly into the hands of your heirs. No heir has yet been born to claim your money later.
If you have estate tax exposure, you may want to consider an Irrevocable Life Insurance Trust (ILIT). The ILIT keeps the death proceeds out of your taxable estate.
Life insurance companies used to send a check directly to the beneficiary. Today, they are more likely to send a checkbook that the payee can access. Life insurance companies claim that this is more convenient for the beneficiary. Call me crazy, but I think they’re doing it to hold on to the money a little longer. Most beneficiaries already have a current account. Why would they want another?
Retirement plans
Deferred retirement plans, including individual retirement accounts, pass through the beneficiary. The same rules apply to the surviving spouse that exist for annuities. Obviously, having a surviving spouse is helpful. The people who wrote this tax code were probably married.
A Roth IRA also passes through the beneficiary, but there are no income tax ramifications for the beneficiary, even if the beneficiary is not the surviving spouse. The people who wrote that part of the tax code were probably divorced but had a bunch of kids.
If the taxes are due when received by a beneficiary, the taxes can be spread over several years using various techniques, including a “beneficiary IRA rollover.” See a financial planner to see what works for you.
Shared ownership
Much property, such as real estate, bank accounts, and brokerage accounts, is jointly owned. The most common form of joint ownership is “joint tenants with right of succession (JTWROS).” The surviving owner automatically receives the asset upon the death of another owner.
JTWROS should not be confused with another type of joint ownership called “tenancy in common”. Tenancy in common divides the property into actual shares and when the owner dies, he can leave the property by will to whomever he chooses. Take a waterfront villa that is jointly owned by two married brothers. If someone dies, he can leave his share to his wife and children. They can then continue to enjoy their sea vacations. Naturally, as this is passed down through the generations, a veritable family rat’s nest is created, but if you can’t fight with family over who gets the best summer weeks, who can you fight?
Property in your name
Now we come to the probate property. If you only own something that does not pass in the ways described above, it becomes part of your inheritance. For example, if you own a savings account in your name only, it passes under your will. Your will designates an executor, a thankless but necessary job. It is up to the executor to inventory your estate and ultimately distribute it to your heirs.
Many people set up and fund “living trusts.” These trusts are created during your lifetime and are funded with assets that would otherwise pass through a will. Since most people are their own trustees, asset control is not an issue. Upon the death of the individual, the assets come under the control of a new trustee. Because the assets are already in trust, they avoid the probate process. The assets are still subject to estate taxes because you controlled them during your lifetime.
That’s the main thing. See a financial planner and estate planning attorney to work through the details. This is an area that isn’t fertile ground for do-it-yourselfers, and death doesn’t allow for mulligans.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be right for you, consult your financial advisor before investing. All performance shown is historical and is not a guarantee of future results. All indices are unmanaged and cannot be invested directly.
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