Estate Planning Basics

Let’s begin with the definition of the term estate. The Merriam-Webster defines the term estate as “the aggregate of property or liabilities of all kinds that a person leaves for disposal at his death”. Simply put an estate is everything you own and/or owe. Thus, effective estate planning is the transfer of ownership of assets of the decedent to the beneficiaries.

Before I begin to speak on the issue of the transfer of assets at death it is important that you first understand the distinction between real property, tangible personal property, and investible assets and how those assets are titled.

Real property consists of assets such as land, homes, businesses, and automobiles or any asset that can be legally titled thus entitle the owner with property rights.

Tangible personal property consists of all the stull we own that cannot be legally titled. Examples would include jewelry, guns, equipment, televisions, furniture, and any other item that could be found in any average household.

Lastly, investible assets consist of bank accounts, certificates of deposits, mutual funds, stocks, bonds, cash value insurance products.

Now on to the subject of titling assets, which for me is the single most important concept of the entire subject of estate planning. Whenever we purchase real property, open a checking account, brokerage account is the decision of how to title the asset. Assets can be titled in a number of various ways for example they can be titled as:

• Individually
• Joint tenants
• Joint tenants with rights of survivorship
• Tenants in common
• Traditional IRA
• Rollover IRA
• 401K
• 403B
• Roth IRA
• 529 Plan
• Uniform Gifts to Minors Act
• Revocable Trust
• Irrevocable Trust

Clearly it is beyond the scope of this writing for me to speak to the definitions and distinctions of the various ways assets can be titled, but what I hope to accomplish is to bring to your attention that there are several ways that assets can be titled.

So why is this important? Because when a person who individually owns an asset dies, who owns the asset? My question isn’t who is supposed to get the asset, but rather at the moment of death who owns the asset? The answer is simply no one. And if no one owns the assets then an estate must be created and filed with the Probate court.

The Probate court is the legal process to provide the administration of the decedents estate by providing the following services including the services of legal counsel “a Lawyer”.

The Probate legal process will look something like this:

• Proving the validity of a will, provided there is one,
• Choosing an estate administrator, executor, or representative,
• Totaling all assets both in and out of the estate,
• Paying all applicable federal, and state income, inheritance, estate taxes, and other debts,
• Identifying all heirs and other relatives
• Distributing any remaining assets to the heirs as described in the will or intestacy statues.

The probate process is open to the public for anyone who may have an interest in the decedents estate, it can be very lengthy, and expensive. Often, I get asked the question “what if I have a Last Will and Testament doesn’t this prevent my estate from having to go through the probate process”, and the answer is no. The reason being is the Last Will and Testament doesn’t solve the issue of no one owning the asset.  The Last Will and Testament is nothing more than a legal document that states who is supposed to get your stuff.

If you die without a Last Will & Testament, then you have died “intestate” and the state intestacy laws will determine who will eventually get your stuff. If the beneficiaries of the estate begin to have differences of how the estate should be divided, these disagreements will tend to take up more time and as the saying goes “time is money” thus driving up the legal fees and reducing what is left for the beneficiaries. Even worse these disagreements can destroy friend and family relationships for generations. Now if all you own is a house, some used furniture, and a couple of cars and are not really concerned what happens after you are gone then the Last Will and Testament should serve your interest just fine. As I have often heard “just let them fight over it”.

So, what can be done to transfer your assets to those you care about while avoiding the probate process? Simple answer jointly title your assets and/or beneficiary designations.

The most effective way for real property and non-retirement investible assets such as bank or brokerage accounts is to title these assets in one of three ways depending on the type of relationship. Joint Tenants, Tenants in Common, and/or Joint Tenants with rights of survivorship. Additionally, depending on the state you live in is the beneficiary option of (TOD) transfer on death. The TOD option generally allows the ownership of the assets to be transferred to the designated beneficiary upon your death.

When it comes to retirement accounts or insurance policies these accounts will transfer by beneficiary designation. Typically, there will be the primary beneficiary or beneficiaries and contingent beneficiary or beneficiaries. Always be certain that your current beneficiary elections are up to date with your distribution desires.

Finally, and possibly the most effective estate management tool is the implementation of a Revocable Living Trust.  If you would like to understand more about the topic of the Revocable Living Trust, please see my article Estate Planning The Revocable Living Trust.

Lastly, I want to disclose that I am not a licensed Attorney at Law and you should seek out a competent estate planning attorney when and if you are ready to implement or review your current estate plan. This document is for educational purposes only and is not my intent to provide legal advice.