Many Estate Planning goals can be accomplished without wills and trusts. Using other tools can spare you some of the estate planning expense and complications of wills and trusts. These strategies also cause the assets to avoid the delay and expense of probate, transferring the title of each asset automatically to the person you intended. But these estate planning strategies can have some disadvantages you have to consider before using them.
You’ll still need a will, and a trust or two as the better way to accomplish some of your estate planning goals. But many assets can be transferred to your intended heirs free of the probate process and the expense of trusts. The best strategy depends on the type of asset involved and whom you’d like to inherit it.
Of course, you can establish a joint title, also known as joint tenancy with right of survivorship. When a non-spouse is the co-owner, however, joint tenancy might create problems. Creating joint tenancy with another person often means you’re making a gift of half the property to the person. You might have to file a gift tax re- turn and use part of your lifetime estate and gift tax credit. Also, both owners have to act together in any future transactions involv- ing the property or give powers of attorney to each other.
Many older people create joint tenancy financial accounts or other assets with an adult child or a friend. They do this to make managing their daily affairs easier or so that someone can pay the bills if they become incapacitated. Of course, one potential problem is that sometimes the new joint owner spends or invests the account without the original owner’s knowledge. Also, this arrangement makes the joint tenant full legal owner of the property after the other owner passes away, and that can create disputes with family members about what was intended.
A joint owner can break the joint tenancy at any time by transferring his or her share of the property to another owner. The consent of the other owner isn’t needed in most states. The transaction creates a tenancy in common between the new owner and the remaining joint owner with no right of survivorship.
Joint tenancy also means the surviving owner might not be allowed to increase the tax basis of the entire property to current fair market value after the other owner passes away. Increasing the basis of the property saves substantial capital gains taxes when property has appreciated. The capital gains taxes might be higher than the cost of probate.
Tenancy in common is another way of owning property with another person. It has many of the problems of joint tenancy, plus when one owner dies the other doesn’t automatically get full legal title to the property. Whether the intended beneficiary is a spouse or non-spouse, there usually are better ways to avoid probate and transfer property to the next owner than joint ownership or tenancy in common. The better choice depends on the type of property.
About 26 states allow married couples to own property in a form of title called tenancy by the entirety. Some states limit that form of title to real estate while others allow it for at least some other assets. In tenancy by the entirety, the spouses own the property together. Legal title passes to the surviving owner automatically on the death of the other owner without probate.
Another benefit of tenancy by the entirety is that the property is subject to the claims of creditors only for debts that are the joint responsibility of both spouses.
Creditors of only one spouse can’t claim any part of property held as tenants in the entirety. Also, neither spouse can transfer any rights to the property or break the tenancy by the entirety acting alone. Both spouses have to agree to sell or give the property.
Tenancy by the entirety is not available in community property states. They have a form of title among married couples that is very similar, known as community property with right of survivorship. Details vary among the states. In some community property states, one spouse may unilaterally terminate the right to survivorship.
Though once obscure, payable on death (POD) bank accounts have become very common. You simply complete a form telling the bank who should inherit the account after you pass. Most states allow PODs, and most banks have standard forms for them, which simplifies estate planning. With a POD, you are the only one with legal rights to the account while you’re alive. There’s no concern about the benefinary accessing the funds or transferring rights to someone else.
After your death, the benefinary should be able to claim the account by showing the bank a death certifi ate and proof of identifi ation. There might be a waiting period before the benefinary actually receives the account or its value. The title to the account doesn’t change. Instead, as the name says, the account value is paid to the benefinary.
There are limits to PODs. In many states, a spouse has marital rights to a minimum percentage of the other spouse’s estate.
Creditors also might have claims against the estate. Either of those claims is superior to the beneficiary’s rights to a POD.
A transfer on death (TOD) account is very similar to a POD. The TOD is allowed in every state except Louisiana and Texas as a way to transfer brokerage accounts or individual securities without probate. Even if you live in a state that doesn’t recognize a TOD account, you still can use it when your broker or the issuer of a security is located in a state that recognizes TOD.
As with the POD, simply tell the broker or issuer what you want to do, and you’ll be asked to complete a TOD designation form.
You can name multiple beneficiaries to a TOD, and each will inherit equal rights to the account. If one beneficiary dies before you do, the account will go equally to the surviving beneficiaries unless you change the designation form.
Your broker might let you also name an alternate TOD beneficiary who will inherit the account if the initial beneficiary doesn’t survive you. The TOD is claimed by the beneficiary after your death the same way a POD is. Also, your spouse or creditors might have rights to the TOD that exceed the beneficiary’s rights.
If you own individual securities, the issuers might have forms that allow you to designate a TOD beneficiary. For U.S. government bonds, you are able to designate a beneficiary when you register ownership of the securities. On the registration form, after your name write “payable on death to” followed by the name of the beneficiary.
Beneficiary designations for motor vehicles similar to a TOD are allowed by 14 states, and a few states allow them for boats or other property for which legal title must be registered. The rules and the process usually are the same as for TODs. When registering your title, ask about designating a beneficiary. If the state allows it, you complete the appropriate form.
Legal title passes to the beneficiary free of probate after your death. You still will be legal owner of the asset during your lifetime and can transfer title to someone without the consent, or even the knowledge, of the beneficiary. You can change your beneficiary or eliminate beneficiaries simply by applying for a new certificate of ownership or registration.
Th beneficiaries of these accounts are named when you opened the accounts or subsequently when you updated the beneficiary designation form. Your will doesn’t affect who inherits these accounts. It is important to review your beneficiary forms periodically to ensure they are up to date and correct, as you can see in the article later in
this issue. There are a few points to keep in mind as you consider these strategies.
When you live in a community property state, the rules might be different. Your spouse might be entitled to a share of all your assets by law. In other states, your spouse or creditors might have rights that are superior to a beneficiary’s rights. Of course, be sure your executor or benefinary knows what you’ve done so that the asset will be inherited as you intended. The assets still must be inventoried and valued to determine if the federal estate tax is owed. Avoiding probate isn’t the same as avoiding the estate tax. Once you establish one of these forms of title, your will has no effect on that asset. If you change your mind, you have to change how you titled the account or registered the asset.
Of course, no matter how many of these strategies you use to avoid probate, you still need a will. There will be assets that can’t be transferred probate-free using these or other tools, and there are other issues that can be handled only through a will.