When creating Living Trusts, most of us know that we need to identify our beneficiaries and the way in which we distribute our assets among them. But something that not infrequently happens is that someone will name a beneficiary in a Will or Living Trust without regard to the beneficiary designation for the individual accounts. When creating Trusts, we remind our clients to make sure their beneficiary designations have been updated to reflect their preferred beneficiary.
Transfer on death assets
Assets that are registered as “transfer on death” or “payable on death”–retirement plans, life insurance policies, IRAs and annuities–automatically pass to beneficiaries when you die, avoiding a legal proceeding.
Here are 5 things you may not know about your assets and beneficiary designations
1. Your beneficiary designation takes precedent over your Will.
This is especially important if you remarry and forget to change old beneficiary designations. In the case of one recent client, he remarried and updated his Trust so that if anything happened to him his new wife would inherit his assets. What he didn’t realize, however, was that if he died, it would be his ex-wife who would inherit his life insurance policy and brokerage accounts because he hadn’t changed the beneficiary designations.
2. Consider the tax consequences for your beneficiary
If you designate someone other than your spouse as a beneficiary, the amount will be counted as your taxable estate and may push you above the estate-tax limit. Inherited assets will be included in their estates as well, which could push them over the tax exclusion limit.
If you leave company retirement plan funds to someone other than your spouse, they may have to take distributions and pay tax on those distributions. A spouse could roll over those assets into an IRA.
3. The custodian (bank, insurance company, etc.) must have your beneficiary form on file.
If the custodian of your account does not have your beneficiary on file, legally there is no beneficiary at all.
4. Some assets/accounts can cost your beneficiaries a lot of money if they pass through the estate
An IRA with a designated beneficiary, for example, is protected from creditors when the owner dies. If it passes through the estate, it can be used to pay the decedent’s debts.
5. Consider beneficiaries with special needs
Those who have dependents with special needs may be taking advantage of government benefits to provide for their wellbeing. Their eligibility for these benefits may be adversely affected if assets are bequested to them directly.
Creating a Special Needs Trust can ensure that these dependents keep their government benefits, remaining eligible to receive additional support from an inheritance.
We encourage our clients to update their Living Trusts with major life changes—those things that might affect an inheritance—birth, death, marriage or divorce. This is a good time to make sure account designations are up to date as well.
“Jason” came in to our Oakland office to change the title on a deed–a routine procedure that sometimes can be completed in a single day. Jason co-owned a home in the Oakland hills, and his name was on the deed along with those of his father and uncle, both deceased. Jason was considering selling the property, and he knew he would need a deed showing that he was the sole owner.
The status of Jason’s deed would be determined by the kind of ownership that had been set up in the original deed. We needed to pull the deed to find out whether they were joint tenants with rights of survivorship or tenants in common.
Joint tenants with rights of survivorship. If the names of the three owners are followed by the words “joint with rights of survivorship”, Jason would have to obtain certified death certificates on his deceased co-owners by going to the deeds office and filing an affidavit to remove their names from the deed.
Tenants in common. If their names are followed by the words “tenants in common”, Jason's deed change suddenly got a whole lot harder. In order to change the deed, both his father’s and uncle’s property needed to go through Probate.
What happens to the property when one of the owners dies?
A key difference between these two types of shared ownership is what happens to the property when one of the owners dies. When a property is owned by joint tenants with survivorship, the interest of a deceased owner automatically gets transferred to the surviving owners. For example, if four joint tenants own a house and one of them dies, each of the three remaining joint tenants ends up with a one-third share of the property. This is called the right of survivorship.
If, on the other hand, the owners were tenants in common, the deceased person’s shares pass to their heirs through a Will or Probate.
The three owners were tenants in common
Unfortunately for Jason, the deed showed that the three property owners were tenants in common. Rather than executing a relatively simple deed transfer, Jason now needed to Probate both his father’s and uncle’s share of the property. Unfortunately, we see a fair number of these kinds of situations. If the family had changed their ownership from tenants in common to right of survivorship while his uncle and father were still alive, the deed change would have been a routine process.
A few more details about deeds
Deeds always contain the names of the old and new owners, a legal description of the property and the signature of the person transferring the property.
Having an updated title is a critical to buying or selling real property.
Understanding joint ownership is especially important for married couples
If you’re married and have other heirs besides your spouse, such as children from a former marriage, then your spouse may not automatically inherit the property you want him/her to have. On the other hand, your spouse may become the beneficiary of property that you intended to go to your children. Updating accounts and deeds is a relatively simple process that will ensure your beneficiary designations reflect your current preferences.
A final note on Probate
Probate is a growing service for California Document Preparers. If it’s uncontested, we assist you through the entire process—all for one flat fee of $4,500.
Dr. Barak Gaster is a Seattle internist who spent three years working with specialists in geriatrics, neurology, palliative care and psychiatry to create a dementia-specific advance directive. The document maps out the stages of dementia: mild, moderate and severe; it asks patients to specify which medical interventions they would want at each phase of the illness.
Identifying end-of-life care while still able to make decisions
“Patients stumble into the advanced stage of dementia before anyone identifies it and talks to them about what’s happening,” said Dr. Gaster. “At what point would they not want medical interventions to keep them alive longer?” Dr. Gaster wants his patients to respond to his directive before the disease has left them unable to make choices.
Ann Vandervelde, 71, is an abstract painter who was familiar with dementia. Her father had died of dementia and, as a hospice volunteer, she had spent time with dementia patients. She also was well aware of the family conflicts that can accompany critical medical decisions.
Not all experts are convinced that another directive is needed
But as Dr. Gaster and his co-authors argue in the JAMA, the current directive doesn’t address dementia and the disease’s progressive nature. Dementia progresses slowly, and in the early stages, patients can still enjoy a high quality of life and are able to make decisions about their care.
An estimated 20%-30% of us will at some point develop dementia
Last year, the journal Demography estimated that for someone born in 1940, the lifetime risk of having some form of dementia at age 70 was 30.8% for men and 37% percent for women. Dr. Gaster has offered his directive to patients qualifying for Medicare. Not surprisingly, those families who have experienced dementia are most responsive to the more comprehensive directive.
Highlights of Dr. Gaster’s directive include the following:
For each stage of dementia, the patient can choose among four options, from full efforts to prolong life to comfort care only.
Patients can opt for lifesaving treatments.
They can opt to receive care where they live but avoid hospitalization, which can be frightening for a dementia patient.
Doctors and nurses are concerned that these end-of-life documents get filed away—it’s not uncommon for documents to be unavailable when it’s time to make critical decisions.
Healthcare professionals are trained to save lives—not allow patients to die
One of the problems with directives is that healthcare professionals are trained to save lives, not necessarily to administer palliative care that will allow their patients to die. It’s not uncommon for family members to ignore the wishes of their loved ones and keep someone alive against their documented wishes.
The takeaway: Families need to get involved
We need to be discussing quality of life issues with our families and healthcare teams–identifying what we find acceptable or unacceptable, what interventions we agree to. The decisions should be documented and shared with family, friends and doctors. For Ann Vandervelde, knowing that she had carefully detailed her end-of-life wishes and shared them with her family gave her a sense of calm. She trusted that the people she loved and trusted would carry out her final wishes.