There are a number of ways your estate can be distributed to your heirs after you pass. 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.
If you pass without a will, it is called “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% of your gross estate.
A will is your written set of instructions on how you want your estate to be distributed.
While using a will also requires 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) acts as the executor and is 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 trust terms, including who you nominate as trustee to manage the assets for the benefit of your beneficiaries. This is often referred to as a “testamentary” trust because it is created as part of the last will and testament and takes effect at the probate of the will.
A trust is a legal arrangement under which one party, the trustee, manages property given by another party, the grantor, for the benefit of a third party, 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 avoid the need for a court-appointed guardian for your trust assets in the event of your incapacity. With certain types of trusts, you may also be able to reduce estate taxes.
If you use a revocable living trust in your estate plan, you may be the grantor, trustee, and beneficiary of your own trust. This allows you to maintain complete control of your estate.
While trusts offer numerous advantages, there are costs associated with establishing them and with having professionals administer them. The use of trusts involves a complex web of tax rules and regulations. You should consult an experienced estate planning professional for assistance with implementing such sophisticated strategies.
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 passes 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. However, “qualified joint tenancy,” 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 non-spouses.
During your life, property held in joint tenancy may be subject to claims by creditors or divorcing spouses of any joint tenant, and how you hold title to your property may have substantial implications for your income and estate taxes. You should therefore consult an attorney for guidance on how to hold title to all of your property.
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 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.
A variety of considerations will determine the distribution methods 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 use a trust to help guide your estate distribution. In addition, any special situations you may have — such as a divorce or a disabled child – should be considered.
An experienced trust and estate planning professional can help account for all these considerations and consult with your other professional advisors to ensure a holistic approach to your estate plan. Make an appointment with an Arvest Trust Officer today to explore your unique circumstances and find peace of mind for you and your family.
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Arvest Wealth Management does not offer tax or legal advice – consult a professional.