Figuratively speaking, life is chock full of road hazards. If we know where they are, then we can avoid them. It is the unknown hazards that are the problem. Just like when you’re traveling on an unfamiliar road, it is best to learn from the experiences of those who have been down that road before. For example, if an automobile in front of you swerves to miss a crater in the road, then you may want to do the same.
The same applies when it comes to estate planning. We can learn a lot from the failures and near misses of others. While these mistakes can be devastating, nevertheless, they can be something we choose to avoid ourselves. In that spirit, let’s consider two commons sources of dangerous estate planning hazards: beneficiary designations and joint tenancy ownership.
Beneficiary Designations
One is often told it is important to have a will or trust set in place as part of their estate plan. Equally as important is having beneficiary designations to ensure the right assets reach the correct people after one passes. But unfortunately, beneficiary designations tend to be overlooked.
Depending on the state in which you live, virtually any titled asset may pass directly upon death simply by adding a beneficiary designation. Likely, many of your assets will pass by a beneficiary designation to include life insurance, annuities, and retirement funds.
In addition, the non-probate transfer laws of many states provide for “pay on death” or “transfer on death” designations that work in much the same manner. Consequently, you may even designate beneficiaries for bank accounts, CDs, stocks and other assets.
Arranging for the transfer of your assets at death via beneficiary designations is attractive for several reasons but partly due to its simplicity and the fact that no attorney is required. While all of this looks smooth on the surface, beneficiary designations can become serious hazards when it comes to your estate planning objectives.
Beneficiary Designations Hazards
In fact, did you know that any assets designated to pass directly to your beneficiaries are not subject to the terms of your estate planning legal documents (i.e., your will or trust)? The truth is, there’s a hefty chance your will or trust will not supersede your beneficiary designations. On top of that, it is your personal responsibility to ensure your beneficiaries are up-to-date, nobody else’s.
Without reviewing and updating your beneficiaries, you may be disinheriting some of your heirs in whole or in part. In addition, any asset protection or special needs planning you created in your will or trust may not take the effect you intended. Keeping your beneficiary designations current is vital when it comes to the success of your estate plan.
To give a specific example, if a recently-divorced woman designates both her then-spouse and son to receive her assets, but her trust only lists her son, the beneficiary designation would trump the trust – meaning that both her ex and her son would receive her assets once she passed.
Based on the latter example, ensuring your beneficiary designations are relevant in regard to your current standpoint in life is important if you wish your assets to be distributed to the right people. However, it is all too common that people fail to keep these current.
Fortunately, upgrading your beneficiaries is a simple process. For some retirement accounts, you can conveniently review and change your beneficiaries online in the comfort of your home. Your beneficiary designations should be checked approximately every three to five years or whenever a major life event occurs such as a death of a loved one, marriage, divorce, or birth of a child.
Although, you may want to speak with an attorney in the event that you wish to designate your assets to minors or someone other than your spouse/partner.
Joint Tenancy Ownership
If you own any assets jointly with others, then you are in good company. Joint tenancy is one of the most common forms of asset ownership. In fact, if you own a bank account, brokerage account or perhaps real estate with one or more persons, then chances are quite good that you and they may be joint tenants. The full legal expression for this form of ownership is Joint Tenants with Rights of Survivorship (JTWROS).
Although JTWROS is most often found on the title to assets owned by married couples in common law states, residents of community property states also should understand JTWROS given the mobile nature of our society. In some states, a special form of joint ownership called Tenancy by the Entireties is available to assets held solely between spouses. There are special “asset protection” aspects to Tenancy the Entireties ownership that can be very beneficial.
When one or more persons hold title to an asset as joint tenants, each of them owns the asset. In most cases, if one joint tenant becomes incapacitated, then the other joint tenant may continue to fully control their JTWROS assets without interference because of their concurrent ownership rights. When one joint tenant dies, the remaining joint tenants continue to own the asset without the need for probate. Ultimately, the sole surviving joint tenant owns the entire asset. This Right of Survivorship is one of the attractive legal features of JTWROS.
Not surprisingly, many JTWROS relationships are between family members. It just seems like the natural thing to do and, especially between spouses in a long-term marriage, it reflects the financial partnership of their commitment.
For this reason, many widows, widowers and other single adults may add trusted family members or friends as JTWROS to their assets. Nevertheless, as with most things in life, there are hidden hazards when it comes to this form of asset ownership.
Joint Ownership Hazards
While it is true that JTWROS may avoid probate at death, this is true only if there is at least one living joint tenant who is not also incapacitated. To ensure this, however, most people add non-spouses as joint tenants.
Whether it is children, siblings or friends, resist the temptation! Once you add a joint tenant to a given asset, he or she also owns the given asset just as you do. What you may have intended merely as a convenience has instead subjected the control, use, and enjoyment of such asset to the potential liabilities of each joint tenant. These liabilities may come in many forms through your joint tenant to include divorces, lawsuits or creditors.
To make matters worse, your plans for the eventual distribution of your assets may be lost through JTWROS ownership upon your passing. For example, your will or trust may not control assets held in JTWROS. Quite often, assets passing to a surviving spouse later end up in JTWROS with a new spouse. That new spouse (and stepchildren) ultimately may receive assets from the previous marriage instead of the children for whom they were originally intended. Disinheritance risks must be carefully considered in every blended family situation.
To avoid the latter joint ownership hazards, it is important that assets with joint ownership are severed with your spouse and any other joint ownerships that are no longer relevant. Additionally, if there are certain assets you wish to be received by someone other than your spouse after you pass, title these appropriately to avoid ownership changes if your spouse remarries.
At Idaho Estate Planning, we are the experts you need to know and trust to provide you the expertise on proper estate planning. Work with us, and we’ll put together a plan that best works for you and your loved ones. Remember, good planning is no accident.
