How Assets Pass at Death
The rules associated with the distribution of assets at death are perhaps some of the most misunderstood rules that exist in the legal community. In general, assets pass in four distinctly separate ways at the time of death, each way being independent of the others.
Jointly Held Property
Assets held jointly with right of survivorship pass to the surviving joint owner. They do not pass under the provisions of the owner’s will. It is common for individuals to establish bank or investment accounts naming a spouse or children as joint owners. This form of joint ownership is often referred to as joint tenancy with right of survivorship (JTROS). Such accounts pass to the surviving joint owner at death and not as directed under your will. Naming one child as a joint owner on a bank account will cause that account to belong exclusively to that child to the exclusion of other children. The child may or may not share the assets with siblings.
Other forms of joint ownership include tenancy by the entirety, which is a form of joint ownership exclusively applicable to spouses. Its treatment is virtually identical to the JTROS treatment in that the surviving spouse becomes the sole owner of the assets at the death of the spouse. The surviving spouse can do with the assets whatever he/she desires. Restrictions placed in a will regarding such assets are not applicable.
One exception to the joint ownership “survivorship” rule is what is referred to as tenancy in common. Real property is often held by business partners or siblings as tenants in common. This means that each person owns an undivided fractional interest of the property. Each person can dispose of his/her interest in his/her will. The words “tenants in common” must be used in the deed to create this form of ownership in real property.
It is most important that everyone understand the nature and extent of any assets held jointly with others and exactly what type of ownership it is in order to avoid problems at death.
Some assets are distributable at death by beneficiary designation. The most common assets designated by beneficiary designation are life insurance, retirement assets such as IRAs, and annuities. Less common forms of assets distributable by beneficiary designation are bank or investment accounts which have a pay on death (POD) designation or a transfer on death (TOD) designation.
All such assets which are distributable by beneficiary designation pass to the named beneficiary and not as directed under your will unless the beneficiary designation is your estate. It is generally not advantageous to cause retirement plans to be payable to your estate.
In structuring beneficiary designations, it is important to consider not only primary beneficiaries, but also secondary beneficiaries who will receive proceeds in the event the primary beneficiary is deceased.
Some assets may be held in a trust at death. The trust may be a Revocable “Living” Trust established by you or it may be a trust which was established by a third party for your benefit, such as a trust established by an individual for his/her spouse or child for life.
In the case of trusts, the trust instrument will direct where the assets pass at the death of the beneficiary. Your will does not dispose of trust assets. In some cases, the trust may grant what is referred to as a power of appointment. A power of appointment grants to the trust beneficiary the power to direct the distribution of the assets at the beneficiary’s death. The power may be broad or it may be limited. If such a power is held and if you desire to direct the assets in a manner other than outlined in the trust, it is imperative that the power be exercised in a very specific way consistent with the terms of the trust.
The only assets that are distributable at death under your will, or by intestacy if you do not have a will, are those assets which are individually held by you and which have no beneficiary designation. Such assets are subject to probate, a court proceeding designed to assure that such assets are distributed as you direct or as provided by law.
It is common with many married couples to find that all assets are jointly held with right of survivorship or are otherwise payable to the surviving spouse by beneficiary designation. In such cases, it is common for no assets to be distributed under the will and that there be no probate administration.
After the death of one spouse, it is more common for the assets to be held individually by the surviving spouse and not jointly with children. Such assets will be distributed as provided under the will of the second spouse to die. Balancing the provisions in one’s will with joint ownership and beneficiary designations may be more difficult than you believe and often results in assets passing in ways other than the decedent intended. Thus, care should be given to how assets are owned and beneficiary designation in any estate planning process.