Leaving a legacy that will be most beneficial to your loved ones takes some planning. If you’ve worked hard and accumulated some wealth, you want to be sure that you’ve done everything possible to provide a smooth transfer of your assets after you die to the people who mean the most to you. When you carefully make your plan using the most appropriate of the four basic methods of leaving a legacy, you can be on the road to having your goals met:
- beneficiary designation, and
- joint tenancy ownership
A Will is the first and most fundamental building block of your estate plan. Your will give instructions for how your assets will be divided and distributed after your death.
Property you own in Ventura County (and elsewhere) can be covered in two ways — by specific bequests and by general bequests. A specific bequest is your instruction to give a specific piece of property to a particular (named) person. For example, you can specify that your son gets your gold coin collection. A general bequest gives an heir a percentage of property or the remainder of the property after all of the specific bequests have been made.
There are some exceptions to what a Will covers:
- Beneficiary designations override what is in a Will. So if you state in your Will that your niece will get the proceeds of your retirement account and she is not the beneficiary named on that account, she will not get it.
- Property owned jointly with rights of survivorship go to the survivor, regardless of what you write in your Will.
- Property in a trust is not governed by what’s in a Will.
- You cannot take away the rights of a surviving spouse by simply leaving him/her out of your Will. State law controls how much your spouse can inherit and that can be up to half of your property.
- Minor children cannot be excluded from receiving benefits as they have inheritance rights. Just make sure you have made arrangements for a guardian.
- State law has limits on what and how much you can leave to charities.
When you put your property in a trust, you are no longer the legal owner. You can control the trust and provide for your heirs with the trust. Property in the trust passes to the named beneficiaries according to the terms of the trust, which you can establish. The two types of trusts are living or revocable and irrevocable.
Living trusts give you a lot of leeway. You can make changes like adding or removing beneficiaries any time you want. At any point, you can add property to the trust or even end the trust. A bonus benefit is that it can protect your assets if you become incapacitated.
An irrevocable trust has staying power. Its terms are set in stone. Its biggest benefits are that it provides a way to minimize estate taxes and it can protect your assets from potential creditors.
Every trust needs a trustee to oversee it. You can be the trustee of your living trust but you must name a successor trustee who will take charge of distributing its assets after your death.
By naming beneficiaries for property that passes directly to heirs, that property bypasses the probate system. So if you have a life insurance policy, an annuity and/or a retirement account, the people on record as designated beneficiaries will get those assets when you die. You can even provide for a charity by naming it as a beneficiary. It is important to name primary (original) beneficiaries and contingent (successor) beneficiaries. You should not name minor children as beneficiaries. You should make provisions to name a guardian who can act on behalf of the minor children and receive proceeds of a trust for the children’s benefit.
Your beneficiaries can end up with a complicated tax situation. Life insurance proceeds are generally exempt from income taxes. But money your beneficiary would receive from your retirement account can be taxable. It is best to get professional guidance before you make someone the designated beneficiary of your retirement account.
Your list of beneficiaries should be reevaluated periodically. If circumstances change, you might want to change beneficiaries.
Is Joint ownership of Bank Accounts a Good Idea?
Owning something with another person and having the right of survivorship continues to be a popular estate option for married couples. An account where spouses who have joint tenancy with rights of survivorship (JTWRS) is also known as tenancy by the entirety. Joint tenancy allows two people to own an asset and the survivor to inherit it. In California and some other states, a married couple who owns things together own them as community property.
You can own something with another person and not have the right of survivorship. That is tenancy in common. You can pass along your share of this jointly owned property to your heirs by listing it in your Will.
Joint ownership has its good and bad points. It can be useful to an heir if you die and he/she can still use the bank accounts you held jointly. But if your partner in joint accounts turns on you and cleans out the accounts, that would be devastating. And if he/she had debts, creditors could go after your share of the asset.