Till Death Do We Part With Our Property, But How?

There are only two things that are certain in life, death and taxes, as the American saying goes. Even at death, one still cannot escape Uncle Sam's taxing power.  Advance planning is important not only for tax purposes but also for an efficient distribution of your assets.   Before we can come up with a plan, we need to first understand how property passes at death.

Broadly speaking, when a person dies, her assets are divided into three categories.  First, assets can be passed down through contractual arrangement to a predesignated beneficiary. Retirement accounts such as 401(k), 403(b), IRA, SEP, KEOGH, etc., belong to this category.  Other assets such as life insurance contracts, annuity contracts, transfer-on-death (TOD) accounts, etc., also have named beneficiaries.  These assets will pass down according to the beneficiary designation without regards to the provisions of our wills unless we specifically name our estate as the beneficiary.

The second category of assets are those that are held in joint tenancy with rights of survivorship (JTWROS).  Like the named beneficiary above, the surviving joint tenant will take property automatically by "operation of law."  For examples, many couples hold their bank accounts as joint tenants with rights of survivorship. Again, these assets are not controlled by our wills.

The last category of assets include everything that is held in our individual names, regardless of what they are or where they are located. Assets held as community property and tenants in common are also in this category.  The significance of this category of these assets is that we can control how and to whom they are distributed.  The legal instrument that we use to distribute these assets is our last will and testament, or our will.  It is important to note that the contracts and JTWROS above take effect first before the provisions of our will are executed. Although the first two groups of assets are not probated, some of them (e.g., retirement accounts) are still considered part of our estate for tax purposes.

It may seem easier to place assets in the first two categories, but your will is the legal tool that can achieve efficiency and tax savings.  For instances, many couples employ tools such as credit shelter trusts and marital trusts in their wills to maximize their tax savings.  In addition to a will, a durable power of attorney and a combined health care power of attorney/living will are also critical legal documents for estate planning and other legal purposes.  A durable power of attorney allows you to designate a legal representative to take care of your financial affairs if you become physically or mentally incapable.  Similarly, a health care power of attorney and a living will will allow you to make health care decisions in advance and also appoint another person to make such decisions for you when you become disabled or sick.