Do You Know How Your Assets are Titled?

Estate Planning Pitfalls Can Occur if You Don’t Know

Estate planning is one of those things that individuals like to put off for another day. Much has been written about the problems that can come with a person’s failure to execute basic estate planning documents, such as a will. However, little has been said about the all-too-common problems that can arise even after estate planning documents have been prepared and signed. Let’s take a look at one such problem- the failure to examine and understand how your assets are titled and the complications that can result.

With estate planning, there are two types of assets: 1) probate assets; and 2) non-probate assets. Let’s start with the second of these- non-probate assets. Non-probate assets are those assets that, by virtue of how they are titled, pass directly to other person upon death. They don’t pass through a will, and, as a result, don’t go through the probate process. For example, if Michael and Sarah have a joint savings account at the bank, that is a non-probate asset. If Michael passes away, his share of the joint account does not pass to the heirs he named in his will, but instead goes directly to Sarah. A life insurance policy with a named beneficiary is another example of a non-probate asset. If Michael names Sarah as his beneficiary to his life insurance policy with the life insurance company, and Michael dies, the life insurance company pays the benefit directly to Sarah, and it does not go to anyone else named in Michael’s will. There are other examples, including with real estate which will be discussed below, but you can see, non-probate assets are those assets that already have a predetermined person to whom they will go upon the (co-) owner’s death.

Probate assets are the other type of asset. These assets are titled (or are owned) only in the name of the person who dies and must go to their rightful new owner only through the probate process. For example, your computer that you are using to view this blog entry is a probate asset. It is owned by you and no one else. As a result, it would need to be probated in order to go to your desired heir once you pass away. Also, a bank account and a home that is only in your name are both other examples of probate assets. These assets must be probated upon death to go to their rightful new owner, your heir, whether that heir is named in your will or determined by the laws of your state, if you don’t have a will. In other words, these assets would be part of the ‘probate estate’ that would need to be filed with the probate court.

Now, here is the little-known fact. A will only controls probate assets. A will does not control non-probate assets. Let’s use an example to demonstrate: Michael, who is single, begins a job as a young man and takes out a life insurance policy. Not being married, he names his parents as the beneficiaries of this policy. Years later, he falls in love with Sarah and marries her and has two children. Michael, who wants to protect his wife and children, has a will professionally prepared that leaves everything he has to them. Michael then dies. The proceeds of his life insurance policy go to. . . his parents. That is because his life insurance policy is a non-probate asset (by the nature of how it is titled, the person who inherits the asset is predetermined). In this case, the parents are the pre-determined heirs of the life insurance policy because they are named as the beneficiary on the policy papers. Non-probate assets trump anything in the will that is to the contrary. It is not enough to provide for your desired heirs by naming them in a will, because that will guides how they inherit your probate assets. You also must examine how your non-probate assets are titled and make sure that your same desired heirs are likewise named. In our above example, Michael should have contacted his life insurance company and changed his beneficiaries of his policy to his wife and children and made other similar changes with all of his other non-probate assets.

Real estate is typically the most valuable asset people own. The titling of real estate (how it is owned) is set forth in the document called a deed. Similar unfortunate estate planning results can occur with deeds to real estate. There are two basic ways to own title to real estate with another person: 1) as ‘tenants in common’; and 2) as ‘joint tenants’ (married people may own real estate as ‘tenants by the entirety’, but this is a just special form of joint tenancy). ‘Joint Tenancy’ allows the real estate to be a non-probate asset, such that when one person dies, the real estate passes directly to the other owner, outside of any probate process. ‘Tenancy in Common’ is just the opposite. If a person who owns a home with another as tenants in common passes away, his share does not go directly to the other owner, but instead passes to his heirs through the probate process.

The significance of these two-word (joint tenancy) and three-word (tenants in common) phrases comes to light in this real-life example: I recently had a woman client come see me after her husband died. She was the husband’s second wife, and he had two children from his first marriage from whom he had been long estranged. He died without a will. Moreover, in his case, he and my client purchased a home prior to marrying and took title in the deed as ‘tenants in common’. When he died, his share of their half-million dollar home did not go directly to his wife, as he no doubt would have wanted, but instead went through his estate, which then had to be probated. As he had no will, his children, albeit estranged, were now deemed heirs together with his wife. This made a very sad time for his wife even more trying. To have prevented this situation, the husband needed only to have changed the deed to ‘joint tenants’ or ‘tenants by the entirety’.

As you can see, when it comes to estate planning, the best of intentions can be undone by failing to appreciate and understand the significance of how the assets are titled. Please feel free to call me if you would like to discuss your estate planning questions and needs.