My boss Dan Garrett has been working with people to plan estates in the most tax-efficient manner for over 30 years. He says he has three questions he always asks clients at his first meeting with them.
- What do you own?
- How do you own it?
- After you’re gone, what do you want to happen to it?
The answers to these questions aren’t necessarily as easy as you might think at first blush.
What do you own?
Most people generally know what they own. The issue is gathering all that information in one place, which becomes important if someone else (a non-involved spouse, power of attorney, executor, child, etc.) needs access to that information . There are quite a few books and electronic documents that could be called “life organizers”. Another alternative is the Provide and Protect website, which is sort of an online organizer that’s tied to a network of estate planning attorneys.
How do you own it?
Legally, there are two types of property: real and personal. How you own your various real and personal property is actually very important to the construction of your estate plan.
- Untitled – Most of your personal possessions will be untitled. Furniture, antiques, guns, collectibles, electronics, family Bibles, jewelry, etc. Untitled personal property gets passed by will. As I have mentioned before, it tends to be disputes over these types of property that cause family discord.
- Fee Simple (Sole Ownership) – You own 100% of the property by yourself and have the right to do whatever you want with it. The entire value of property owned in this way is attributable to your estate, and will be included in probate. You pass on this property to your heirs either by virtue of your will or your state’s intestacy laws (if you have no will).
- Tenancy in Common – Property is owned by two or more related or unrelated people. This is most commonly used when the owners are non-spouses. Each person will own an undivided interest in their portion of the property. The portions do not have to be equal. Each owner’s interest treated as though it were owned outright, and each owner can do what they want with their portion regardless of what the other owner(s) think. The value of the property attributable to your estate depends on what percentage ownership you have. In many states, this is the default ownership form, if no alternative form of ownership is selected.
- Joint Tenancy (with Right of Survivorship) – Property is owned by two or more related or unrelated people. A primary difference between Joint Tenancy and Tenancy in Common is that upon the death of one of the joint tenants, the decedent’s interest transfers to the surviving joint tenant(s) outside of the probate process (but according the state titling law). Property owned jointly between non-spouses is included in the owner’s estate to the extent of the original contribution percentage. Spouses owning property jointly are deemed to have each contributed 50% of the original cost.
- Tenancy by the Entirety – Essentially the same as Joint Tenancy between a husband and wife. Tenancy by the Entirety is only available to a married couple, and terminates at divorce or death of one of the spouses. 50% of the value of the estate is included in the decedent’s estate, and the deceased spouse’s interest in the property transfers to the survivor without need of probate.
- Community Property – There are nine states that recognize community property between spouses. In general, community property is any property owned by a spouse prior to marriage, or any property gifted or bequeathed to a spouse during marriage. Otherwise, any assets acquired during marriage is presumed to be community property – with one-half owned by each spouse. Upon the death of a spouse, the 50% owned by the deceased is included in his/her estate and will generally transfer without probate to the surviving spouse (assuming that all surviving children are also the children of the surviving spouse; otherwise the deceased spouse’s interest goes to the children).
In summary, the type of ownership makes a difference in 1) what you can do with an asset individually while you’re alive, 2) how much of the value of an asset is included in your estate at death, and 3) the manner in which that asset can be transferred at death.
After you’re gone, what do you want to happen to it?
I’ve talked in this space before about having an intentional estate plan. Your state has laws that say what happens to your assets after you pass away in the absence of your own instructions. These are called intestacy laws. If you are willing to let your state government and the court system decide on distribution of your stuff (i.e. you don’t have a will), you should at least be aware of what’s going to happen.
There are only three places your estate assets can go once you pass away:
- The government, generally in the form of estate taxes
- Your family or other heirs
- Charity
I have a presumption that everyone wants to minimize to the legal extent possible the amount going to the government. I have yet to personally meet someone who wants to pay more taxes (Warren Buffett notwithstanding).
If you want to choose which family members get particular parts or amounts of your estate, you must do that by will. If you want someone not blood related (or distantly related) to receive an inheritance from you, you must specify that in a will. State intestacy law won’t automatically make your rich old uncle’s estate yours. He had to affirmatively choose you as his heir.
If you want your church, alma mater, Boy Scout troop, local art museum, or other charitable organization to receive anything of your estate, you must put it in your will.
Actually, this is a good place to note something else. In addition to the jointly-owned property listed above, there are some other assets that cannot pass by will.
- Retirement assets (pass by beneficiary designation)
- Life insurance proceeds (pass by beneficiary designation)
- Pension proceeds (pass by beneficiary designation)
- Any banking or investment product with a POD (payable on death) or TOD (transfer on death) designation
- Assets already inside a living trust (the trust document specifies distribution)
- Interest in a business partnership (if the partnership agreement specifies a method of transfer, such as a buy/sell agreement)
In order to effectively plan for the distribution of your estate, you need to know the answers to these three questions. So how are you doing with that? If you’ve got any questions, feel free to contact us.
My email address is chris.sargent (at) acu.edu. Our toll-free phone number is 1-800-979-1906. The services of The ACU Foundation are completely confidential and completely free of obligation or monetary cost.
Disclaimer: All information on this blog is for educational purposes only. Employees of The ACU Foundation, and the writer of this blog specifically, are not attorneys and are not your adviser. Call us or come see us if you have any questions about this. See here for a more comprehensive (and more boring) version of this disclaimer.