Death, Taxes and teenage texting – this is a certainty of life. The tax code is too complex for anyone to understand, and why teens can text all day but never write a thank you is an unsolved mystery.
Death on the other hand is somewhat easier. One day you are reading the newspaper and the next day you are in it. Let’s see what happens to your property once everyone knows where to send flowers.
First, and surprising to some, most of your property probably won’t end up in probate court. Only those who pass will go through the process. If you don’t have a will, don’t worry, the state has one for you. Of course the state never met you and didn’t know how you wanted things to be distributed, but whose fault was that? Dying without a will is called an intestation. You don’t want to die as a will. Go see an estate planning attorney and get well.
Now that we’ve got that done, here’s how to pass the properties.
Life Insurance and Annuities
The death benefit is paid to the named beneficiary. Unless you name your estate as a beneficiary, the death benefit will escape probate. Generally, it is not a good idea to name your plantation as a beneficiary. One reason is that the assets on your estate are available to creditors. The benefits are also slower to reach your heirs. An unborn heir who wants your money slower than faster.
If you are subject to property taxes, you may want to consider an irrevocable life insurance trust (ILIT). ILIT keeps the death proceeds from your taxable property.
Life insurance companies usually send checks directly to the recipient. Today they are more likely to send a checkbook that is accessible to the beneficiary. Life insurance companies claim this is more convenient for beneficiaries. Call me crazy, but I think they did it to hold the money a little longer. Most of the beneficiaries already have a checking account. Why do they want anything else?
Retirement plan
Deferred Retirement Plans, including Individual Retirement Accounts, pass through the beneficiary. The same rules apply to surviving spouses who are there for annuities. It definitely helps to have a surviving partner. The person who wrote this tax code was probably married.
A Roth IRA also passes through the beneficiary, but has no income tax consequences to the beneficiary, even if the beneficiary is not a living spouse. The people who wrote this part of the tax code may be divorced, but have many children.
If taxes are due when they are received by the beneficiary, the tax can be compounded over a number of years by different techniques including an “IRA beneficiary rollover.” Visit a financial planner to see what’s right for you.
Shared Property
Many properties such as real estate, bank accounts, and brokerage accounts are jointly owned. The most common form of co-ownership is “co-tenant with the right to survive (JTWROS).” The surviving owner automatically gets the assets upon the death of the other owner.
JTWROS should not be confused with another type of co-ownership called “co-leasing”. A co-tenancy divides the property in actual shares and when the owner dies, they can leave the property at will to whomever they wish. Take a beach hut shared by two married brothers. If a person dies, he can leave his share to his wife and children. They can then continue to enjoy their seaside vacation. Naturally, as generations pass, the real family mouse nest is made, but if you can’t fight with the family about who gets the prime summer weeks, who can you fight?
Property In Your Own Name
Now we come to the properties that pass the will. If you simply own something that doesn’t pass in the manner described above, it becomes part of your will. For example, if you have a savings account in your own name, it will be against your will. Your will mentions an executor, a thankless but necessary job. It is up to the executor to take an inventory of your will and ultimately distribute it to your heirs.
Many people set up and fund “living trusts.” This trust is established over your lifetime and is funded with assets that would otherwise pass through a will. Since most people are their own guardians, control over assets is not a problem. On the death of the individual, the assets are under the control of the new guardian. Because the assets were already in trust, they escaped the probate process. Assets are still subject to estate taxes because you control them for the rest of your life.
Those are the basics. See a financial planner and estate planning attorney to work out the details. This is an area that is not fertile ground to do it alone, and death does not allow mulligans.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations to any individual. To determine which investment is right for you, consult your financial advisor before investing. All performance referenced is historical and does not guarantee future results. All indexes are unmanaged and cannot be invested directly.