It’s truly remarkable how many folks want to draft a will to ensure their assets end up where they want them to go after they’re gone, without considering the other methods available for transferring assets. They often inquire about the hierarchy between a will and other documents. As much as I’d love to see legal documents duke it out in some paper-and-ink arena, it’s not quite that simple. Since my documents don’t come to life like characters in an animation, a document battle remains a far-fetched idea. So, let’s explore more practical ways.
This brings us to the topic at hand: the four primary methods of asset transfer, which I’m about to dive into in this blog post.
A Will – Your Initial Line of Defense (and Sometimes, the Final One)
A will has control over property that goes through probate, meaning it doesn’t have a beneficiary designation, transfer-on-death, or pay-on-death designation, and isn’t titled within a trust. Typically, a trust is complemented by a will to transfer assets into the trust, but that’s not always the case. While a will is a fundamental document in estate planning, it only governs what happens to specific types of assets.
Trusts – They Rule Over What They Inherit
If you opt for a trust, the trust agreement will dictate who receives assets, but only if those assets are titled in the trust’s name. I’ve come across many trust documents where I asked what was placed inside the trust, only to be met with blank stares. Many people mistakenly assume that just creating a trust document and listing the desired assets is sufficient. But to truly place assets in the trust’s name, you need to transfer the title. Real estate requires a deed, investment accounts need change-of-ownership forms, the DMV must be informed about vehicle transfers, and banks should be made aware of new accounts under the trust’s name. This process is known as “funding the trust” and is crucial. Without proper funding, the trust agreement can’t determine property distribution because it only controls assets it owns. Many individuals who think they have it all sorted are caught off guard when an asset isn’t titled in the trust’s name. A well-thought-out estate plan should include a strategy for funding the trust, whether it’s the creator, the attorney, or another party who handles it.
Lady Bird Deed, Transfer on Death and Pay on Death
Without a trust to facilitate asset transfer, you can use transfer-on-death or pay-on-death designations to bypass probate and directly allocate assets to a designated beneficiary. Transfer-on-death is typically linked to investment accounts like stocks or bonds, while pay-on-death is associated with bank accounts. Both methods allow assets to transfer to the chosen person without the need for probate and can’t be overridden solely by a will. It’s vital to review each beneficiary designation and ensure they are up-to-date and correctly arranged. Otherwise, an outdated beneficiary could end up receiving the assets.
A beneficiary designation is a means to transfer investment assets upon the owner’s death. These designations are set up for popular accounts like IRAs, 401(k)s, 403(b)s, Roth IRAs, Thrift Savings Plans, life insurance policies, annuities, and similar investments or policies. These designations are part of the insurance contract, ensuring assets avoid probate and specify where the money goes upon the owner’s passing. Many mistakenly assume that a will controls all assets, but that’s not the case with beneficiary designations, transfer-on-death designations, or pay-on-death designations. These determine who inherits these specific types of assets, regardless of what the will states. It’s crucial to align your beneficiary designations with your wishes as outlined in your will.
In Texas, real estate can be transferred using a beneficiary deed. This deed must be signed and recorded while the property owner is still alive, allowing for a straightforward transfer without probate. If certain real estate or accounts have beneficiary designations, those designations dictate who receives the assets.
A Real-Life Example
Let me share a real-life story: I had a client whose husband recently passed away. He set up his IRA 43 years ago when he was married to his first wife. When he passed, his second wife discovered that the first wife was still listed as the IRA beneficiary. Despite being the current wife when her husband passed away, she likely won’t receive the full IRA. This oversight in updating beneficiary designations could cost her a significant sum. This unfortunate situation brought her to me, and I had to deliver the tough news that she’d likely get much less than she had planned for.
Texas Residents: Secure Your Legacy Properly
Crafting an estate plan that ensures seamless coordination among all your documents requires thoughtful planning. It’s more than just having the right documents; it’s about having a comprehensive plan. If you’re a Texas resident, we’re here to assist you in getting your estate plan in perfect order. Let’s get started by scheduling an appointment today.