It is tempting to take estate planning advice from friends and family, or people you trust such as bankers, financial advisors, and CPAs. Estate planning is a complex matter that entails consideration of many and diverse factors. While these people may have your best interests at heart, they may not know what they do not know.
Some people are attracted to certain asset transfer methods that appear straightforward and do not require a lawyer’s assistance. The belief is that these methods eliminate the need for legal guidance because they can get assets into the hands of your loved ones after you are gone without a will or living trust.
As we will discuss in this blog, these methods have serious risks that are not obvious at first glance. In this blog, we will expose the most serious shortcomings of the 2 most popular methods that people ask about.
To avoid these risks, it is best to work with an attorney who focuses on estate planning to recommend a plan that fits, and to put the ideal plan in place.
Accepting “Simple Solutions”
One major estate plan mistake is using joint tenancy with right of survivorship without appreciating all its risks. Let’s say that you own your house, and you are going to leave it to your only daughter. You could add her name to the title or deed with some very specific wording, and after your passing, she would become the sole owner.
A would-be benefit that people mention is that this transfer would not be subject to probate. If you made a will instead, will would require probate to be effective.
Probate is a legal process that often has significant drawbacks. It can be costly, and people who are in line for bequests have to play a waiting game. It can take six to 13 months in Ohio, or longer, and inheritances cannot be distributed until a final accounting is done by the Personal Representative for every transaction, and submitted to the heirs.
If you want to avoid probate, joint tenancy may be alluring on the surface, but when you dig deeper, there are huge potential problems. For one, as soon as you add your daughter to the ownership documents, she would legally own half of the house. You would have to get her cooperation if you decide to sell the home, refinance a mortgage, or get a home equity loan.
If your daughter had a judgment against her from a lawsuit, the interest in your property that she owns would be available to the entity seeking redress by foreclosing on a judgment lien. A sale of the house could be forced to compel payment of your daughter’s debt.
Stocks and mutual funds and bank accounts can be set up in joint ownership in the same manner, and the same issues and risks would apply.
Everything may go well, but there are no guarantees. There are other deficiencies in joint tenancy as a planning option beyond the scope of this blog. There are safer options that you can use to ensure an efficient and effective transfer of the property in a probate free manner.
Setting up payable on death or transfer on death accounts as offered by banks and brokerages, without understanding the shortcomings and restrictions, is another common mistake. When you open the account, or at some point down the road, you can exercise the transfer on death option and add a beneficiary.
After your passing, the beneficiary would obtain the death certificate and present it to the financial institution. At that point, if everything is in order, the beneficiary would become the owner of the account. Once again, probate would not be a factor. Some states, including Ohio, offer the same option for transferring real estate at the death of the owner.
Direct beneficiary designations to take the place of a will or a living trust for an estate plan can be a mistake because of their limitations. For example, you may be allowed to add more than one beneficiary but may not be able not split up the percentages in any way that you see fit. The banks and brokerage firms may require equal distributions among beneficiaries, and this may not be consistent with your wishes. Living children of a named beneficiary who dies before you may be excluded, even though that would not be your wishes. They may also require all beneficiaries to claim their shares before they release any money or holdings to anyone. Each company will have its own rules about this and many other matters, which few people if any read or understand before adopting this strategy. They can change the rules any time, without notice. There are tax issues as well when naming direct beneficiaries for mutual fund accounts related to taxation of capital gains.
Some people instruct a single beneficiary to distribute the assets among others in a certain prescribed manner. The inheritor that received the instructions would not be legally compelled to follow them. There would also be risks such as the death or incapacitation of the specified beneficiary that interferes with those instructions. Plus, a transfer of more than $15,000.00 to a donee requires a gift tax return to be filed.
Lump Sum Distributions are Not Always Desirable.
The result of joint tenancy and pay on death/transfer on death is that the heirs receive their inheritance immediately, outright, and free of any specifications or instructions. While this result may be acceptable for some heirs, it may not be prudent for others, such as the very young and inexperienced, irresponsible heirs, or the very old or incapacitated. There is no flexibility to these strategies or ability to adapt to the uncertainty of life.
There is a very common estate plan mistake to consider. Far too many people view estate planning as something that is only relevant to senior citizens. Even some folks that are in their 60s think that they have time to act on the creation of an inheritance plan later on, and in some instances, they are right.
However, individuals who put the matter on the back burner often pass away intestate, which is the condition of dying without any estate planning documents at all. When this happens, a probate court steps in to determine how the resources should be distributed according to state laws.
In many if not most cases, when there is no estate plan and these laws are followed, the assets are distributed in a manner that would not be consistent with the wishes of the decedent.
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To find out whether the simple strategies discussed in this blog are a fit for you, consult a qualified estate planning lawyer who devotes his or her practice to this area. This is not an area for lawyers who dabble.
The limitations of Joint Tenancy and Pay-on-Death/Transfer on Death strategies are a deeper subject than we can discuss in a blog. Click the link to contact us for our free report titled The Risks of Joint Ownership and Direct Beneficiary Designations as an Estate Planning Strategy for a thorough study of these approaches. https://zimmerlawfirm.com/contact-us/
We have prepared a very useful worksheet that will help you focus on how well you have done in your personal estate planning. There is no charge for this valuable resource, and you can visit our worksheet download page to obtain your copy.
Also, visit our website to see a schedule of our upcoming estate planning seminars. https://zimmerlawfirm.com/seminars/