Did You Turn Off the Iron Before You Left the House?

I could probably travel around the world on the gas I’ve used up turning around to return home to make sure I turned off the iron or the oven or lowered the garage door. But such return trips are necessary lest the house burn down or be burglarized. Finalizing your estate plan requires the same effort.

Many people assume that if they have a will in place, then their estate will be distributed as they wish. A will, however, only controls certain assets. It is likely that some of your assets will pass outside of the will’s terms. Assets that have a beneficiary designation are generally not controlled by your will. Examples of this type of asset are life insurance, individual retirement accounts (IRAs), and annuities. These assets will be distributed to the beneficiary named on the form that is on file with the company. It is possible that your designations do not reflect your current wishes. Divorce, death, and other changes in relationships can all render former beneficiary designations incorrect.

Parents frequently handle beneficiary designations without understanding the consequences of their choices. Frequently I learn from clients that they named one adult child out of several to be beneficiary of the life insurance, IRA, or annuity. Their reasoning is that the chosen child will “do the right thing” and distribute the funds equally among his or her siblings after the parent’s death. Such an arrangement hands the chosen child several issues, among them gift tax consequences upon making gifts of the proceeds to the other children, income tax issues if the asset is a traditional IRA, and the emotional quagmire of being the “chosen” child among several.

Another common mistake is the naming of minor children as the outright recipients of assets like life insurance, annuities or IRAs. Children under eighteen years old are not old enough to own property under North Carolina law. The asset designated for the minor children will end up held in a custodianship with the clerk of court overseeing the distribution of the assets and the child receiving the asset at the tender age of eighteen (18). The better designation would be the trustee of a trust established by the parent under his or her will or revocable trust.

You may decide that the easiest designation is “the estate.” This sounds simple and straightforward but it requires the asset go through probate, resulting in an additional tax levied by the court. Further, if “the estate” is the beneficiary of a traditional IRA, the payout time is only five years, an arrangement that can result in a higher income tax.

In addition to checking your beneficiary designations, you should consider how your assets are titled. You may own some assets jointly with another person, which can impact how real property or an account passes at a death. Married couples typically own their personal residence as husband and wife, which results in the surviving spouse owning the residence outright regardless of the terms of the will. If two or more people own an asset together without rights of survivorship, then each person’s interest is controlled by his or her will (or the intestate laws, which determine inheritance when there is no will). If two or more people own an asset jointly with right of survivorship, then upon the death of one owner, the surviving owner or owners receive the deceased owner’s interest. Check your deed or account statement for the magic words “jointly with rights of survivorship.” If those words are not in the deed or on the account, then the owner can control the passing of their interest in the property or account in their will.

Be aware that you can make an account that is in your name and is not a typical beneficiary-designated account into one by changing the account to “payable on death” or “transfer on death.” These type of accounts, which are available under North Carolina law, can then pass outside of probate to your named beneficiaries.

Turn off the iron, lower the garage door. Tidy up your loose estate ends by checking on your beneficiaries, the titling of your assets and reviewing your will. You’re living now so now is the time.

Originally published in Southern Neighbor, June 2010

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