How Can I Control the
Distribution of My Estate?
There are a number of ways
your estate can be distributed to your heirs after your death. Each allows a
different degree of control over distribution, and each poses different
challenges and opportunities. If you haven’t taken steps already, it’s
important to consider planning now for the distribution of your assets.
Intestacy
If you die without a will,
it is called dying “intestate.”
In these situations, the probate court will order your debts paid and your assets distributed.
Unfortunately, your assets will be distributed according to state law. Since the
state doesn’t know your preferences, the probate court may not distribute your
assets according to your wishes.
Because intestacy is
settled in the probate court, your heirs may have to endure a long, costly, and
public probate process that could take six months to a year or more. They will
have to wait until the probate process is over to receive the bulk of their
inheritance.
And depending on the
state, probate fees could consume more than 5 percent of your gross estate.
Wills
A will is your written set
of instructions on how you would like to distribute your estate upon death.
While using a will
guarantees probate, it is a more desirable alternative than intestacy.
In a will, you can name a
“personal representative” of your estate. This person or institution (e.g.,
a bank or trust company) will act as the executor and will be appointed to carry
out your wishes according to your testament. You can also nominate a guardian
for your minor children and their estates. Without such a nomination, the court
can appoint a guardian based on other information, often depending upon who
volunteers.
A will can also set forth
the terms of a trust of which you have named a trustee who can manage the assets
for the benefit of the beneficiaries. This is often referred to as a
“testamentary” trust because it is created as part of the last will and
testament and comes into being at the probate of the will.
Trusts
A trust is a legal
arrangement under which one person, the trustee, manages property given by
another party, the trustor, for the benefit of a third person, the beneficiary.
Trusts can be very effective estate planning tools.
Trusts can be established
during your life or at death. They give you maximum control over the
distribution of your estate. Trust property will be distributed according to the
terms of the trust, without the time, cost, and publicity of probate.
Trusts have other
advantages too. You can benefit from the services of professional asset
managers, and you can protect your assets in the event of your incapacity. With
certain types of trusts, you may also be able to reduce estate taxes.
While trusts offer
numerous advantages, they involve up-front costs and ongoing administrative
fees. These costs reduce the value of future probate savings.
If you use a revocable
living trust in your estate plan, you may be the trustor, trustee, and
beneficiary of your own trust. This allows you to maintain complete control of
your estate. The use of trusts involves a complex web of tax rules and
regulations. You might consider enlisting the counsel of an experienced
estate-planning professional before implementing such sophisticated strategies.
Joint Ownership
Another way to distribute
your estate is through jointly held property — specifically, joint tenancy
with rights of survivorship.
When you hold property
this way, it will pass to the surviving co-owners automatically, “by operation
of law.” Because title passes automatically, there is no need for probate.
Joint tenancy can involve
any number of people, and it does not have to be between spouses. “Qualified
joint tenancy,” however, can only exist between spouses. In common law states,
this arrangement is generally known as “tenancy by the entirety.” Qualified
joint tenancy has certain income and estate tax advantages over joint tenancy
involving nonspouses.
How you hold title to your
property may have substantial implications for your income and estate taxes. You
should consider how you hold title to all of your property, including your real
estate, investments, and savings accounts. If you’d like to know more about
how the way you hold title may affect your financial situation, consult a
professional.
Contracts
The fifth and final way to
pass your property interests is through beneficiary designations.
If you have an
employer-sponsored retirement plan, an IRA, life insurance, or an annuity
contract, you probably designated a beneficiary for the proceeds of the
contract. The rights to the proceeds will pass automatically to the person you
selected. Just like joint tenancy, this happens automatically, without the need
for probate.
It is important to review
your employer-sponsored retirement plan, IRA, life insurance, and other
contracts to make sure your beneficiary designations reflect your current
wishes. Don’t wait until it’s too late.
Many Considerations
There are a variety of
considerations that will determine the distribution methods that are appropriate
for you. For example, you must consider your distribution goals. By examining
your situation and understanding how your assets will pass after your death, you
may be able to identify the methods that will help you achieve your goals most
effectively.
Likewise, the larger your
estate, the more you may want to consider using a trust to help guide your
estate distribution. In addition, you will have to consider any special
situations you may have — such as a divorce or a disabled child. All these are
important considerations. Consult a professional to discuss your options.
© 2003 Emerald Publications
