Estate-Planning Tools: Estate planning is implemented with legal documents, including change-of-ownership or change-of-beneficiary documents.
(a) Methods of Death-Time Asset Transfers. Asset ownership and beneficiary designations are an essential element of effective estate planning. Assets are transferred at death in one of three ways:
(i) Operation of Law. Some forms of property ownership determine, by legal definition, who will immediately succeed to a deceased co-owner’s interest in the property. Examples include joint tenancy, community property with a right of survivorship, and life estates. Financial accounts you hold “in trust for” a designated beneficiary and registered securities you hold “transferrable on death to” a designated beneficiary will be given to the designated beneficiary upon your death. In these situations, legal title passes the instant of death.
(ii) Contract. You can arrange to have money or other assets transferred to designated beneficiaries upon your death under various contracts, including life insurance, trusts, retirement benefits, annuities, partnership agreements, and stock-purchase (“buy-sell”) agreements. The beneficiaries’ rights spring into being at the moment of your death.
(iii) Probate. All of your assets which do not pass by operation of law or by contract pass through probate or intestacy proceedings. Your personal representative is called an “executor” if named in your will or “administrator” if not. “Probate” refers to the court proceeding required to transfer the assets of a decedent which do not pass directly by law or contract. To avoid probate, either (a) don’t die or (b) use the non-probate forms of ownership which allow your assets to pass to your beneficiaries by operation of law or under a contract. A will does NOT alleviate the need for probate. A will may clarify and simplify probate, but it is of very limited value until it is probated. Probate proceedings vary from state to state, but similar rules apply in most states.
(b) Basic Estate-Planning Tools. The two most common estate-planning tools are the “last will and testament” and the “revocable living trust”. These are tools of the law and can include elements of a contract. For assets passing under a will, the probate laws will apply, usually requiring a court proceeding except for what the law defines as smaller estates.
(c) Importance of Ownership Designations. An effective estate plan requires that ownership and beneficiary-designation documents are consistent with the plan. Far too often, a person’s ownership and beneficiary-designation documents are inconsistent with his or her will or trust and with his or her true objectives. For example, you cannot own a home in joint tenancy with one person (which passes title at death by operation of law) and leave that same home to someone else in your will (which only affects property subject to probate). Similarly, you cannot designate one person as a beneficiary under a life insurance policy (which passes the proceeds by contract) and expect that person to share with siblings or to use the insurance proceeds to pay off debts or pay funeral expenses.