CHAPTER 1:
ESTATE PLANNING BASICS
Different Kinds of Property and the Law
Part of the challenge in presenting a broad and unfamiliar body of information to people is that everything is tied together, so where to start? This concept is as good as anywhere. Skim through material you already know. As you reach something unfamiliar, read more closely and things will become clearer. (If you skipped the Introduction, you might want to go back and take a quick look.)
Your “estate” is simply everything you own – your property, your assets. When we use the words “property” or “assets,” we’re talking about money, real estate, your sofa, shoes – everything. So everybody has an estate, from very small to very large.
Most of us have a fairly good idea of what a Will is – a statement directing how some of your property is to be distributed after your death. The portion of your property distributed according to your Will is “probate property.” Probate property is one of two broad classes of property you need to be aware of before we go any further. Non-probate property is the other one. Let’s look at each in turn.
(A couple of terms you’ll see on this website and other reading about estate planning: A person who dies – a Decedent – with a Will is said to have died testate and is called the Testator – the Will-maker. A Decedent who dies without a Will has died intestate. We use the terms Testator and Will-maker interchangeably here.)
Probate Property
All states have a division in their court systems responsible for probating Wills and administering Decedents’ estates, whether you have a Will or not. Usually this is called the Probate Court or Surrogate’s Court. Your probate estate includes any property subject to the authority of this court.
Property you own in your name alone – and which no one has been chosen to receive in some “non-Will” manner (discussed below) – is all probate property. This can be real estate, financial accounts of any kind or just household “stuff.”
You (almost always) want to have the lion’s share – but not all – of your property in the non-probate category. (As we’ll see later, leaving “some” readily accessible money in your probate estate is necessary to enable the final settling of your affairs.)
In other words, you want to minimize the property like cash accounts, real estate and other things that are subject to the supervision of the Probate Court. That means transferring most of your financial and other assets to your loved ones some way other than using your Will. It’s nearly universal advice: “Avoid probate!”
For just two words, that’s great. But any good attorney will tell you that “avoiding probate” in itself is not a “plan” at all. It is very easy to hold one’s entire estate as non-probate property – with totally unintended, undesirable and even terrible consequences.
We’ll examine the tools available to avoid probate. But . . .
It’s crucial to coordinate these probate avoidance tools in an overarching estate plan.
With that in mind, let’s look at the ways we can own property in a non-probate manner, allowing it to pass outside of Probate Court.
Non-Probate Property
A variety of non-probate techniques and planning options are available to ensure that your real estate, money and worldly possessions end up quickly and directly where you want. Therefore, they’re only a good idea to use with responsible adult beneficiaries. E.g., You don’t want a large chunk of money going directly to a 13-year-old or somebody with a substance abuse problem.
These non-probate means of property dispositions are extremely useful and common, but not all of them can be used for every type of property. Below is a list. The critical feature of these property dispositions outside probate is that your Will has no control over them. Zero (unless the beneficiary has died and you haven’t named an alternate).
The critical feature of non-probate property dispositions is that your Will has no control over them.
And if it is not included in your Will, the Probate Court has no authority over this property. Therefore, by avoiding Probate Court you can save a lot of time, hassle and money. (There are, however, laws in some states that override some of the “outside probate” property dispositions upon divorce.)
Again, if you use any of these non-probate property disposition tools, make sure they are part of a comprehensive plan. When the dust settles after your passing, all your property should wind up where you wanted it to go.
Property Owned by a Living Trust
This is a very useful and widely recommended tool. A Trust is a legal entity that can own things. If you have young or irresponsible adult beneficiaries, a Trust is a good idea. You can not only avoid probate, but delay property distribution if you want, so that young or irresponsible beneficiaries don’t get their money right away. A Trust allows you to put a wide variety of strings on property distribution.
A “living” Trust is simply one that is created by you during your lifetime. (Alternatively, some Trusts are created only after death in one’s Will.) If you have transferred property to a Living Trust, that property can be distributed by the Trustee to whomever the Trust document directs without the Probate Court’s involvement.
But the formal re-titling of an asset is essential for the Trust to have any control over it. We’ll look at Trusts more closely in subsequent chapters.
Property Owned Jointly with Right of Survivorship
The best example of this is the way most married couples own their homes and bank accounts. (Some spouses prefer to maintain individual accounts, however, which presents no problem if handled correctly.)
When each of two or more joint owners of an asset has a stake (usually equal) in the whole account or asset, the share of the first to die automatically shifts to the surviving joint owner at the moment of death. A Will has no control over this property.
Beneficiary Designations
This is a powerful tool. When you name a person, Trust or charity as the beneficiary of a life insurance policy, retirement account, or any other financial account, that designation determines who will receive the proceeds upon your death.
This money is not controlled by your Will and is therefore not part of your probate estate. The proceeds of the policy or account can be transferred (almost) at once to whomever is designated – without court involvement. Your designated beneficiary simply presents your death certificate and collects the insurance money or takes over your retirement account. (Retirement account beneficiaries will often benefit from some financial advice before simply cashing out.)
Beneficiary designations can make life easier for your survivors. But it is important to make them with an eye on your overall plan of estate distribution. (See my personal family anecdote below for what can go wrong.)
Of course, your choice of beneficiary can be changed at any point in your life. But make sure these designation forms are filled out as you wish. Sometimes the forms are short. If they do not allow room for multiple names, for example, speak up and address the issue with whomever has presented you with the form.
Make your wishes clear at the outset. If the company or institution you are dealing with is not cooperative you might have to see your lawyer. Just do not let the matter slide or leave the beneficiary form blank. If a beneficiary designation form is blank, the policy or account proceeds do become part of your probate estate, which is exactly what you were trying to avoid.
If your wishes or life situation change, be sure to revisit all your accounts and policies that have beneficiary designations to make sure they reflect your new circumstances. Otherwise, upon divorce for example, your ex-spouse might have a solid claim on anything naming them as beneficiary.
Many – but not all – states now have laws that remove an ex-spouse automatically from beneficiary designation forms so that the policy or account proceeds will go to the alternate beneficiaries that you have (hopefully) named.
But these laws differ, and your Ex might have an argument that you actually still intended to leave them as your beneficiary despite the divorce. Better to change the designation form directly rather than rely on any law your state might have to bail you out.
Additionally, keep in mind that state laws do not automatically apply at all to plans covered by federal law such as 401(k)s and pensions. Federal law does, however, allow state law to take over the division of these accounts in divorces cases. But the spouses will need a special type of court order called a QDRO. Your lawyer will know about this.
Pay-On-Death (POD) Bank Accounts and Transfer-On-Death (TOD) Brokerage Accounts
The name of these accounts says it all. They come with a beneficiary designation form, much like insurance policies and retirement accounts. They are another powerful tool and an easy way for many people to transfer most or all of their money to whomever they want and completely avoid court doing it. The cautionary notes above apply to these accounts, however.
I have found them to be useful, but they have “cons” as well as “pros.” So some attorneys advise against them as a blanket rule. It all depends on your individual situation. Be sure to discuss your overall financial and estate plan with your attorney (and financial planner, if you have one).
To make an account POD or TOD, just tell your financial institutions what you want to do, and they will provide the necessary paperwork. This is an extremely common arrangement and can be very helpful. But beware: Many financial institutions will recommend it on their own, even though that might not be your best move.
If you do create a POD or TOD account, make sure the form is filled out so it jibes with your overall plan. Here’s what happened in my family:
My father’s Will named me Executor and divided his estate equally among my brother, my sister and me.
(I had moved to Lexington, Kentucky. Mom and Dad were in northern New Jersey where I grew up. They had a long-time lawyer friend there. I deliberately tried not to insert myself into their affairs. I was probably remiss in not doing so; The family lawyer gave my parents incomplete advice.)
I was surprised to find Dad had just one of my parents’ bank certificates of deposit Payable On Death – payable to me alone. None of his other accounts were POD. (All of them should have been POD to his three children, equally. My fault for not giving advice.) Dad handled the family finances but did not hear well; There was probably some miscommunication at the bank.
I knew very well, however, that my parents did not intend to give this CD only to me. But by using a Pay-On-Death account and filling out the forms improperly that’s precisely what they did. I would have been absolutely within my rights to keep the money all to myself. I didn’t take advantage of the mistake. I split the proceeds with my brother and sister.
But you can easily see how mistakes like this could lead to hurt feelings or a family feud. (This is a big reason why some lawyers don’t like POD or TOD accounts at all.)
Look at the “big picture” of your distribution plan when making every individual POD and TOD designation. Make sure that the end result of all your POD and TOD designations is the distribution of your total pot of money – large or small – as you wish.
Transfer On Death Deeds and “Lady Bird” Deeds (Enhanced Life Estate Deeds)
First, check to see if your state allows them. Many states do not. Some states allow one type, some allow both. If allowed, you need to see a lawyer to redo your current deed. These deeds are a great way to transfer your house and other real estate just like a TOD brokerage account – directly to your beneficiary, avoiding Probate Court.
(There is a growing movement around the country to adopt the Uniform Real Property Transfer on Death Act. So if your state doesn’t allow these deeds yet, stay tuned.)
Secondly, the obvious question – of absolutely no legal significance: Why “Lady Bird?” There is some mystery here. By one account, President Lyndon B. Johnson’s family lawyer invented a legal technique to transfer Lyndon’s real estate to his wife, Claudia “Lady Bird” Johnson.” This is probably a myth, however; Apparently no one in the Johnson family ever heard about it.
Many believe Florida attorney Jerome Solkoff invented the term. In his book and lecture materials, Solkoff made up some characters, including “Lady Bird,” to create a scenario and describe the benefits of this type of deed. Over time, the fictional name stuck, probably because Lady Bird was a popular First Lady. It really doesn’t matter.
There are some differences between TOD and Lady Bird deeds. These can be important in some situations. We won’t get into them here, but in both TOD and Lady Bird deeds, the property remains completely under your control (i.e., you can sell it or whatever). When the property owners eventually pass away, the deed then transfers the property to the named beneficiary.
These types of deeds can save a lot of time and money by avoiding Probate Court. Like any estate planning tool or decision, however, they can involve cons as well as pros for a particular family. That’s why you should discuss your family situation thoroughly with a lawyer.
Intestate Property
If you have not planned for the passage of an asset using a Will or one of the non-Will (i.e., non-probate) property transfer techniques we’ve just looked at, you are relying on a combination of state law and luck. Your state’s statute on “intestacy” or “descent and distribution” takes over as to this property.
All states have such a law. It sets out the rules that apply in your state when a person dies without directing – in some fashion – to whom an account or item of property should go. This is administered by the Probate Court.
These statutory rules vary widely among states. But they are completely inflexible. So if they result in a distribution arrangement you wouldn’t want, create hardships or divide your family, that’s just too bad! Simple as that. (The intestate distribution laws generally do make some sense; Your property will be distributed to your family. It’s not as if a judge can decide to give it to somebody else.)
Many people assume that even without a Will their spouse would inherit 100% of their property. That’s true in a large handful of states, but not true in many states. In most states, the children you and your spouse share would inherit a big chunk of your estate – maybe one third to one half.
If they are minors, the court would appoint a Guardian over the property, but the kids would receive it outright when they turned 18 years old. In my experience, that result is almost never what people want.
Without proper planning for the distribution of your property, you are relying on a combination of state law and pure luck!
Another rule is that the Decedent’s parents very often take priority over the Decedent’s siblings. In no situation, however, does the state itself ever take the Decedent’s property – unless the Decedent has absolutely no blood relatives who can be found.
Some people worry about their spouse’s side of the family directly inheriting their money if they don’t have a Will. But that’s one problem that isn’t going to happen under the law of any state.
(Of course, if you die first and your property goes to your spouse, it could eventually wind up passing to your brother-in-law, for example, under your spouse’s Will. A Trust can be set up to keep family strings on your money and avoid that scenario.)
A Word About Community Property
The topic of community property often comes up in discussions about estate planning (and divorce). It is derived from Spanish law. It is a form of property ownership between a husband and wife recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
The other 41 states are “common law” states; They follow a marital property ownership system based on American “common law,” which originated in England.
Three groups of people should pay close attention to community property:
Spouses who now live in a community property state,
Spouses who now live in a common law state, but who acquired property while living previously in a community property state, and
Spouses who now live in a community property state, but who acquired money or property while living in a common law state.
Community property works like this: Regardless of the names on title documents, ownership of (almost) all money and other property acquired during the marriage by either spouse is considered to be shared. Each spouse owns a 50% interest.
(Property brought into a marriage by either spouse, however, remains that spouse’s 100% sole and separate property. Likewise, property acquired by either spouse by gift or inheritance remains that spouse’s sole and separate property.)
Importantly, each spouse has a 50% share of all income from the wages and self-employment earned by either spouse during the marriage.
Although community property is basically a simple concept, the devil is in the details. We can’t cover every scenario here because state laws vary. Things can get complicated if a spouse earns money in a common law state, then moves to a community property state or vice versa.
Bottom line: If you have ever lived in a community property state while married, consult a lawyer to see where each spouse stands with respect to ownership rights of the couple’s money and other property upon death (or divorce).