As estate planners, one of our first tasks is explaining the four different categories of assets relevant to estate planning, and why each is important in the context of a trust, or frankly any person's estate plan (even if they don't have a will, trust or powers of attorney). This goes beyond "classes" of assets, such as bank accounts, brokerage accounts, real estate, 401k's, etc., but instead deals with how each of these asset classes is transferred upon death (either by default -- through the operation of law -- or through affirmative action by the owner).
Without a complete understanding of these concepts, it is possible that a person can actually have multiple "estate plans" (even after establishing a will or trust) because of improper titling/beneficiary designations.
Accordingly, the purpose of this article is to demystify the devolution of the following asset groups:
Beneficiary Designated Assets (Retirement Plans, Insurance)
Generally speaking, beneficiary designated assets are those that allow you, the owner, to select (typically via a company's form) who you want to receive that asset upon your death. Most commonly, beneficiary designated assets are qualified retirement plans (401k, IRA, Roth IRA, etc.) and life insurance. Thus, if you have a beneficiary designation with either asset class, the funds from these assets will, by contractual agreement, be transferred to the person or persons listed on your beneficiary designation form.
These forms are followed strictly by the company administering the asset, so without active attention to the beneficiaries listed on these forms, it is possible that these assets may end up in the hands of people different than who may have intended.
Additionally, if you have a will or trust, a beneficiary designation naming individuals may result in unequal distribution of assets among family members, particularly if the person designated to receive the account is different than persons named in your estate plan. If no beneficiary designation form is on file with the company administering the asset, the default beneficiary is your probate estate (see below).
While a trust can easily be named as the beneficiary of a life insurance policy, it is only possible to name a trust as the beneficiary of a qualified retirement plan if the trust has specialized "conduit trust" or "accumulation trust" language which allows a trust to be the owner of a retirement plan.
Jointly Owned Property (Bank/Brokerage Accounts/Real Estate)
When you have a bank or brokerage account where one or more person is listed as the owner, upon the death of one of the owners, the account, by "operation of law," becomes the sole property of the surviving joint owner.
While not technically a "joint account", another way that bank/brokerage accounts are distribution upon death is through payable on death ("POD") or transfer on death ("TOD") designation; POD/TOD designations are similar to beneficiary designations (described above), where an account is owned by an individual, but upon their death, the balance of designated accounts goes to the named person, who takes ownership of the account upon the account owner's death.
In the context of real estate, when more than one person owns property, it can be held as:
"Joint tenants with right of survivorship" (i.e., two unmarried people co-owning property), or
“Community property with right of survivorship" (i.e., a married couple co-owning property), title to the property immediately transfers to the surviving owner upon the first death, or
As "tenants in common," in which case each co-owner owns a "pro rata" share of the property, which portion will be distributed according to each coowner's estate plan or through intestacy (described below). Again, this can be problematic in the context of an estate plan if title to the property does not reflect the owner's testamentary wishes.
Trust Owned Property
A crucial part of the estate planning process is focused on identifying your current assets and how they are owned to make a game plan to determine how to re-title your property into the name of your trust. Doing so ensures that all of your assets are disposed of through your trust to provide consistent and fair treatment of your beneficiaries.
"Probate" Property
This is all other property that is not beneficiary designated, jointly owned, or owned by a trust - it is also property governed and disposed of by a Last Will & Testament, or through intestacy (i.e., a probate estate where there is no will; who receives the balance of your estate is governed by statute). Often this is property that is owned merely in the name of the individual.
Upon the individual's death, if the value of this property exceeds the statutory limits set by the State of Arizona, a probate will be required to transfer this property to the individual's loved ones.
We actively attempt to avoid the probate process by utilizing revocable trusts to reduce the time, effort, and unnecessary expenses intrinsic to the probate court process. Unfortunately, without a revocable trust, probate is necessary to deal with "probate" property even if a person has a Last Will & Testament.