My family recently purchased a new vehicle. To organize all the variables factoring into our decision, my wife Heather created a spreadsheet. The variables included fuel efficiency, trunk size, headroom, and cost. While my two sons lobbied extensively for a larger, sportier vehicle, Heather and I were not quite ready to “Die With Zero,” and so we opted for a medium-sized SUV instead.
In this month’s update, I briefly summarize the five separate legal means (“legal vehicles”) for the transfer of an asset at death, and the importance of categorizing one’s assets in one of these legal vehicles. An asset is transferred by the first of the following five legal vehicles:
Joint Ownership
First, an asset could pass by joint ownership. Jointly owned assets might be like a child’s teeter-totter; it is a “winner take all” arrangement. Whoever falls off the teeter-totter first loses a right to control the assets at death, and the winner will have the entire value of the assets fall to him or her at the bottom of the teeter-totter. The deceased co-owner’s legal estate plan has no relevance in these arrangements. Instead, the assets become owned by the surviving owner, and are subject to the surviving owner’s own financial situation, family situation, contractual obligations, and even tax liabilities.1
Beneficiary-Designated Assets
Second, assets passing by a beneficiary designation are distributed by a legal contract made with the administrator of the asset. These types of assets are like a pre-programmed elevator—the rider of the elevator is brought to the floor directed before the ride began. The deceased owner directs where the asset is to be distributed at death, and no fiduciary involvement is legally necessary.
Trust Assets
Third, assets owned in trust are distributed according to the terms of a trust agreement. Assets transferred through a trust is akin to the Amazon delivery truck. The Amazon delivery vehicle does not own the item being delivered; the vehicle is simply the means of delivery. Likewise, the trust is the vehicle by which assets are delivered from the original asset owner to the new owner(s) (“beneficiaries”) named by the trust agreement.
Probate Transfer Subject to a Will
Fourth, if assets are not categorized into one of the three categories mentioned above, the assets become part of your “estate” at death. If you had a Last Will in place at your death, the terms of your Will are then “read” and legally applied to assets in this category. Transferring assets through a probate proceeding according to a Will is akin to how a tardy student must stop in at the principal’s office to obtain a “tardy slip” before heading to class. The student will still be able to attend the rest of the day; the beneficiaries of an estate will ultimately benefit from the assets subject to the probate. Before the student can proceed, however, there is a cost and delay associated with the probate proceedings.2
Probate Transfer Subject to Intestacy
Fifth, if assets are not categorized into one of the first three categories mentioned above, and if you had no Will in place at death, then not only do the assets become part of your “estate” at death, and thereby subject to probate, but the beneficiaries of your estate are dictated by state law. These state rules are called “rules of intestacy.” Transferring assets through an intestacy probate proceeding is akin to a school uniform policy. You attend school and everyone has the same fashion plan, with no allowed departures. Everyone who dies with a spouse surviving has the same plan; everyone who dies with no spouse surviving but children surviving has the same plan.
Just as Heather developed a spreadsheet to organize the factors in our car purchase, everyone should have some way of organizing their current assets into one of these categories. If you are in the market for an SUV, send me a message, and I will send you Heather’s spreadsheet. If you or your clients need a spreadsheet to organize assets, let us know, and we can send you a template. While Heather’s spreadsheet will soon be outdated by new vehicle models, the five means of legal transfers are not likely to change, at least not anytime soon. In that regard, we would be glad to help you and your clients with understanding how assets pass at death.
1 If your co-owner has creditor issues or is involved in divorce proceedings, a creditor or divorcing spouse may seek to compel you to sell the property, even if the property was only transferred to the co-owner to achieve estate planning objectives.
2 If you die with these types of “probate” assets, a court would require family members to (1) submit your Will to the court to confirm that your Will was properly signed, (2) provide “public notice” of your death through the relevant legal newspaper, (3) allow your creditors a certain amount of time to make claims for unpaid debts or expenses, (4) take steps to make sure that the directions given under your Will are carried out.