I am amazed at how often people want a will written to make sure their assets go where they want when they die, but have never considered what other methods of transferring assets exist. And…what different types of asset transfer options are available to use. These people want me to write a will to make sure assets go where the individual desires. At the same time, they want to know which document will win, a will, or something else.
Although I would love to see the documents fight things out in a little arena of document battle, I am unsure how that would work, since they are made of paper and ink. Paper and ink do not make for lively contestants in battle. If they were animated, that could be a different story, but since my documents are not animations, battle of the documents seems like an unlikely solution. Without an animation battle, and wanting to avoid a battle of documents altogether, there must be a different way.
This leads me to a discussion of the four main methods to transfer assets…the subject of this blog post (how convenient, I know!). Wills, Trusts, Transfer on Death designations, and Beneficiary Designations are the four ways discussed in this post.
1. A Will – the First Line of Defense (but also the Final Line of Defense)
A will controls property that is subject to probate. This is property that does not have a beneficiary designation, transfer on death, or pay on death designation, or is not titled in a trust. Oftentimes a trust will have a companion will that puts things into the trust, but that is not always the case. A will is an important document, but only it is works in agreement with the other documents. A will is a foundational document for estate planning, but a will only controls what happens to certain types of assets.
2. Trusts – They Only Control What Gets Put In
If you choose to create a trust, then the trust agreement will control who receives assets, but only if the assets are titled in the name of the trust. I have read many trusts for people, and asked what was put into the trust, only to be met with stunned silence. Many people assume that simply creating a trust document and listing assets they desire to be in the trust is enough. It is not.
For assets to be titled in the name of the trust, title needs to be transferred to the trust. Real estate requires a deed to do this, investment accounts have change of ownership forms, the DMV needs to know about vehicles (if they are being re-titled), and a bank needs to know about a new account in the name of the trust.
Changing ownership on assets is called “funding the trust,” and is important to do. If these things are not done, then a trust agreement will not control how property is distributed because a trust can only control property it owns. Many people who thought they had everything handled are caught off guard when an asset is not properly titled in the name of a trust. A proper estate plan will include a plan for who should fund the trust, whether that be whoever created the trust, the attorney drafting the trust, or someone else.
3. Transfer on Death, or Pay on Death
Without using a trust to transfer assets, a transfer on death, or pay of death, designation can transfer assets outside of probate directly to a beneficiary. Transfer on death designation usually is associated with an investment account for stocks, bonds, or other non-qualified, or post tax investments. A pay of death designation is generally associated with a bank account. Both methods can transfer assets to the designated person without the need to go through probate, and both methods cannot be undone by just having a will.
Each beneficiary designation and transfer or pay on death designation must be carefully reviewed to ensure it is accurate, up to date, and properly set up.
Otherwise, an old (or outdated) beneficiary may receive assets, instead of the right person.
4. Beneficiary Designations
A beneficiary designation is a way to transfer an investment asset to someone at the death of the investment’s owner. Beneficiary designations are set up for popular and common accounts like and IRA, 401(k), 403(b), Roth IRA, Thrift Savings Plan, life insurance policies, annuities, or other similar investments or policies. The beneficiary designation is part of the insurance contract, so that assets pass outside of probate, and says exactly where the money will go when someone dies.
A common misconception is that a will controls what happens to all assets, but with a beneficiary designation, this is not true. Beneficiary designations, transfer on death designations, and pay on death designations will control who gets these types of assets, no matter what a will says. It is important to make sure your beneficiary designations agree with what you want to have happen, or what you have written in a will.
Real estate can be transferred using a beneficiary deed in Colorado. This type of deed needs to be signed and recorded before someone dies, but allows for the transfer of real estate at the clerk and recorder’s level, instead of going through probate. If certain piece of real estate, or an account has a beneficiary designation, the beneficiary designation will control who gets the money.
I had a client whose husband passed away recently. He set up his IRA 43 years ago, when he was married to his first wife. When he died, his second wife discovered that the first wife was still listed as the beneficiary of his IRA. Although the second wife, who was the current wife when her husband dies, should be able to claim a portion of the IRA under the the spouse’s elective share rules in Colorado, this failure to update the beneficiary designation will probably mean 50% of the IRA will go to a woman who divorced him over 35 years ago. My client came to me to help with this situation, and I had to tell her that she probably was going to get a lot less money than she planned to receive. Her husband’s failure to update his beneficiary designations cost her a lot of money.
Set Yourself Up Properly
Having an estate plan that allows all documents to work together requires careful planning. As we say, “Have a plan, not just documents.” You can accomplish this by working with a professional to get your plan together and ready. Schedule an appointment to get started by going here.