The importance of establishing a Last Will and Testament (“Will”) or other testamentary substitute(s) (such as a revocable trust) for all competent adults to dispose of their assets at death cannot be overstated. Without a formal plan for distributing assets to a client’s beneficiaries provided in a Will or trust, the intestacy laws of the client’s state of residence will dictate a plan for them to dispose of these assets instead.
Wills and testamentary substitutes operate best when functioning as part of an overall strategy for transferring the assets of their creator’s estate as opposed to standing alone as a substitute for a comprehensive estate plan. Clients may be unaware of the importance of coordinating the provisions of their Will or trust with the lifetime and death transfers of their assets. This lack of coordination can have unintended consequences and negative effects on their family members and beneficiaries. Not every item of property can be transferred by a Will or trust, and sometimes, such a transfer is not even optimal.
For example, retirement benefits or accounts such as IRAs, which are typically transferred by contractual beneficiary designations and are subject to laws and regulations governing their transfer, will bypass a decedent’s Will or trust without express direction to the contrary. Further, without exact language for such accounts incorporated into a Will or trust, the distribution of such accounts to an estate or trust instead of to a properly designated individual could cause the account to be distributed more quickly and have negative tax effects.
One major source of confusion for clients is the notion that if they create a Will or trust, this instrument controls the disposition of all their assets. If a decedent’s property is transferred automatically at death by title, operation of law, or by contract, however, the transfer of these will not occur via their Will. This distinction is often referred to colloquially as “probate” versus “non-probate property.” Probate is the process of getting a Will approved by a court and having the personal representatives named in the Will officially recognized and appointed by the Court. Hence, property passing via a Will is often known as “probate property” whereas property passing outside of a Will is called “non-probate property.”
Non-probate property appears in many forms but primarily involves:
(a) Jointly held property (such as joint bank accounts and real property held jointly with rights of survivorship).
(b) Property passing via beneficiary designation (such as retirement accounts and life insurance).
(c) Securities and accounts with transfer on death designations (see, e.g., N.Y. EPTL §13-4.1 ff.).
(d) Transfers with retained life estates.
In addition, property that is titled in a trust will also pass outside of a decedent’s Will. The ease of creating and changing these non-probate transfers can sometimes be (or become) problematic for clients transferring assets because clients typically create or update these transfers without considering their overall plan.
The creation of non-probate transfers can be beneficial to clients and their beneficiaries because they typically offer some degree of privacy and can often be completed by a surviving beneficiary by submitting a claim form and death certificate. Non-probate transfers work best where the named beneficiaries are all competent adults. Non-probate transfers are often inappropriate for minor or disabled beneficiaries or anyone who should not receive such property directly (such as beneficiaries with addictions or creditor problems). Where a client’s favored beneficiaries are minors or suffering from a disability, the use of a will containing a trust, or a separate lifetime trust, typically provides better results.
Moreover, clients often neglect to update or correct beneficiary designations on their non-probate transfers. Improper beneficiary designations often cannot be corrected via a Will or trust because these vehicles are bypassed by such non-probate property. Failure to update the beneficiary information for non-probate transfers (e.g., in the event of a divorce) is often a source of tension and litigation between family members. Additionally, such transfers can cause problems in a blended family situation as they cannot defeat the claims of a surviving spouse or prevent heirs from squabbling over the proceeds.
In addition, clients sometimes forget to inform their estate planners about the existence of a beneficiary designation or an account, which can adversely affect a plan. For instance, in a plan relying solely upon beneficiary designations to transfer a client’s property, the failure to properly designate beneficiaries for a single account will force the heirs to use the decedent’s Will to transfer the account, costing them additional time and money.
Although non-probate transfers can provide convenient means of conveying assets, such transfers should be created as part of a client’s overall estate plan to better protect their family and chosen beneficiaries. If you have questions about coordinating your non-probate transfers with your estate plan, the experienced wealth transfer attorneys at DarrowEverett LLP are available to assist you.
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