BRATTLEBORO—Upon death, your property passes into the estate, unless it was in trust or jointly owned. The probate process determines how that property is to be distributed.
This process has its benefits and its costs. Probate provides a forum in which a family can air concerns and work out differences. But it can also aggravate those issues, taking time and money before the matter is resolved.
Many estate planning attorneys assist their clients to avoid probate altogether, if possible — a strategy that requires careful review of all current and potential assets.
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The two primary tools used to transfer assets on death are beneficiary designations and trusts.
A trust creates a relationship between the maker and the trustee in which assets are held for the owner’s benefit during life, then held in trust or distributed to beneficiaries afterward.
Trusts are useful mechanisms to achieve particular purposes for managing and distributing assets to loved ones or to charitable organizations.
But trusts can create tax problems for certain types of assets, such as retirement accounts. They can also be complex and more costly to create.
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Beneficiary designations generally cost nothing and are relatively simple to accomplish. A beneficiary designation is the act of naming a person or an entity to whom you want your assets to pass upon your death. Typically, you would designate a spouse or a child to be your beneficiary. Groups of people such as your children, nieces, and nephews can also serve as beneficiaries. Such designations are important tools in any estate plan.
Most personal assets allow for various forms of beneficiary designations. Today, individuals generally hold much their net worth in their homes and in their retirement accounts. Other common assets include cars, bank accounts and certificates of deposit, and other investments, such as stocks, bonds, and other real estate.
Without thinking of the drawbacks, some older people will add a grown child’s name to a bank account, putting that account at risk of claims against that child by an ex-spouse or lawsuit, or the chance that the child might withdraw half of the money for personal use.
The better option is to create transfer-on-death or pay-on-death designations so that the bank account or CD passes upon death to that child or other loved ones.
Beneficiary designations can be set up for most contractual-based accounts, like IRAs, 401Ks, annuities, pensions, and life insurance proceeds, assuming there would be assets held at death. This way, the property never becomes part of the estate but passes to the designee entirely outside of probate. Without such designations, all of these assets would pass into the estate of the holder at that person’s death.
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For cars and homes, the state of Vermont has special rules.
The Department of Motor Vehicles has a transfer-on-death form, which allows you to designate a person to whom vehicle title will pass upon your death. This avoids having to add a person to the title during your lifetime, which could cause additional insurance premiums and transfer taxes.
Vermont also permits enhanced life estate deeds for your real estate, allowing you to transfer your home to your children or to your trust while retaining all rights of ownership, including the right to take it back, mortgage it, give it away, or sell it. This is known as an LBJ deed.
Such deeds achieve probate avoidance, and they offer other important benefits in Medicaid planning for your home. There are tax consequences to certain kinds of titling, so be sure to consult a tax advisor and an estate-planning attorney before creating new deeds to real property.
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Naming beneficiaries should be undertaken thoughtfully. Be sure to name an alternate if your named beneficiary dies before you.
Make sure you understand how the property would pass if you designate your two children and one dies during your lifetime, leaving children (your grandchildren). Do you want your property passing only to your surviving child? If you prefer that your deceased child’s share passes onto that child’s children, then you will want to be sure to permit distribution per stirpes.
Think through the consequences of property being distributed to a minor child, a person with special needs, or someone who may not be responsible with money. Remember to update beneficiary designations if anything changes, such as births, deaths, and divorces. Unintended consequences are common without careful planning. Be sure to keep copies of all signed designation forms for your records.
In estate planning, probate avoidance will succeed only if you remember to plan for potential assets and payouts. Consider monies paid out in loans, security deposits, or down payments on assisted living facilities that will be returned to the estate without an alternate designation. Even one overlooked savings account can be enough to require that your executor open a probate estate.
Careful planning is key.