The First Mistake In Estate Planning

First Mistake In Estate Planning

After you have completed your Will, executed your Financial Power of Attorney and Health Care Power of Attorney and Living Will, you might think you have done everything necessary to resolve your estate, both during your lifetime and after you pass.

At this point, or maybe before, you need to take a crucial step, a step many forget or do not recognize. This is the Number 1 estate planning mistake. It is to forget about beneficiary designations and titling of assets.

Years ago I remember a fellow attorney commenting – what do most people have when they die? If they are married, it is usually primarily the house or other real estate which is jointly titled and retirement funds. Add to that their interest in life insurance and together you have the “Non-Probate” estate, the portion of the estate that does not pass by Will.

Some fairly sophisticated people believe that everything passes by Will. It does not. Sometimes in order to demonstrate the point, I draw a line down the center of a whiteboard and write “Probate” on one side and “Non-Probate” on the other and list and total the figures in each column. It can be surprising how much of an estate will pass outside the Will.

Probate assets are those that are distributed under the terms of a Will. Non-probate assets pass by other means which are typically joint titling, payable on death accounts, or beneficiary designations. Again, for married people, the question often does not come to mind because Wills are typically written leaving all assets to the surviving spouse and assets including the house are titled jointly and go to the survivor. Also, IRA’s, 401(k)’s and retirement funds generally usually designate the surviving spouse.

However, to the extent these designations are different sometimes problems arise and it is often, although not always, after the death of the first spouse.

After Dad or Mom dies, if the surviving spouse titles the house jointly with one of the children as joint tenants with right of survivorship, it does not matter that the Will says assets are to be equally divided among the children. The house goes to the child who is jointly named on the Deed. If bank accounts or investment accounts are titled POD (payable on death) or TOD (transfer on death), it does not matter what the Will says. The account goes to the person named as POD or TOD. If that is what you want, that can be fine. It is just important to know that what you are doing reflects what you want.

The idea that titling affects final distribution can be particularly troubling for seniors. Most husbands and wives are accustomed to titling assets jointly.  When one of them dies, the survivor considers adding children to the account so that a trusted family member will also be able to pay bills and make deposits. The parent may not realize that joint titling can change the estate plan.

If the account that is jointly titled is what I refer to as an “in and out” account, that is one where monthly checks are deposited and checks are written to cover them and a small balance remains each month, there is no great financial impact. But if the accounts are substantial, there can be.

The joint titling question becomes more emotional when seniors title their assets jointly with their adult children or grandchildren and view this as one way of transferring ownership to the next generation. Whether this type of informal “estate plan” makes sense depends on the circumstances.

When a parent titles his or her bank and investment accounts as joint tenants with right of survivorship (JTWROS) with one of his children but not with others, that child could unintentionally receive a disproportionate share of the estate. On the other hand, where a widowed parent has only one child, for instance, and only one bank account and no real estate, sometimes jointly titling assets can avoid probate (but not taxes) entirely.

When considering your estate plan it is best to play out all the possibilities with all the assets including those that do not pass by the Will and see how they would go. It is also important to get help if the questions cannot be easily answered.

About the Author Greg Russell

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