You have done your job. You have saved in your retirement plan. You have life insurance. You own your house jointly with your spouse. You have a “payable on death” clause in your bank account directing it to your kids. Surprisingly, if your assets are set up this way, then your will may have very little impact, if any, on where your assets will eventually end up. This is because law and other obligations will supersede your will.
When you die, all of your assets can pass in one of only four ways:
- By Contract — Certain assets allow you to name your ultimate beneficiaries. For instance, you likely did this when you qualified for your retirement plan, first opened up your IRA account, or set up your life insurance policies. Through this design, the organization or company that has custody over these assets are contractually obligated to pay the proceeds to your beneficiary at your death and supersedes the language in your will.
- By Trust – A trust is generally a formal document that allows a trustee to control assets for the benefit of the eventual beneficiaries. Any assets you place into a trust will be distributed according to the instructions of your trust and not your will. As the trustee is obligated to follow the terms of the trust, these assets are treated similarly to assets designated by contract.
- For example, a common estate planning technique is the use of a revocable trust as a substitute for a will. In such a trust, your assets are transferred and retitled in the name of the trust while you remain in control of the assets during your life.
- By Law – State law can also determine where your property ultimately goes. Assets that are titled as “joint tenancy with rights of survivorship” will pass directly to the co-owner of the property and not according to your will. Less than half the states, including Maryland and Virginia, still also allow “tenancy by the entirety”, which is a special type of joint ownership that exists only between spouses and cannot be sold or attached by creditors without the permission of both owners.
- Ten mainly Southern and Western states, including Texas and California, have “community property” laws. Such laws presume that most property acquired during a marriage are presumed to be held 50-50 by the two spouses. However, any property acquired before marriage or inherited by one spouse is still deemed separately owned.
- Additionally, if you die without a will, your state’s intestacy laws determine the ultimate beneficiaries of your estate.
- By Will — Other property that do not have any of the above directives attached will pass by your will.
Understanding and using the first three methods are certainly effective methods of transferring property, and have the added benefit of avoiding probate. However, be careful before spending too much time or money at preparing a sophisticated will if most or all of your property is contained within these categories.