The deceased person cannot “walk away” from his or her debts when death occurs. Before any money is distributed to heirs, state law requires that all of the deceased’s creditors be notified of the death, usually by posting a notice in a local newspaper. In this manner, creditors can collect what they are owed from the estate. Surviving relatives have no personal obligation to repay the decedent’s creditors for debts that exceed the assets of the estate.
Probate
When planning for the disposal of your estate, realize that your surviving family members do not conduct the distribution of your assets after death. The distributions are either set up by you before your death or conducted by a probate court a special court that is specifically charged to conduct the distribution of assets of people who have died. Probate is a court-supervised process that allows creditors to present claims against an estate and ensures the transfer of a decedent’s assets to the rightful beneficiaries according to a properly executed and valid will or, when no will exists, to the people, agencies, or organizations requiredby state law.
Probate and Nonprobate Property
Figure 18.1 illustrates the different ways that your property can be distributed after your death. Nonprobate property, which does not go through probate, includes assets transferred to survivors by contract (such as naming a beneficiary for your retirement plan or with bank accounts owned with another person through joint tenancy with right of survivorship). Trusts can also be used to transfer assets outside of probate. The remaining probate property goes through the courtsupervised probate process of publicly administering the disposition of an estate. A decedent’s probate property consists of what
Probate
When planning for the disposal of your estate, realize that your surviving family members do not conduct the distribution of your assets after death. The distributions are either set up by you before your death or conducted by a probate court a special court that is specifically charged to conduct the distribution of assets of people who have died. Probate is a court-supervised process that allows creditors to present claims against an estate and ensures the transfer of a decedent’s assets to the rightful beneficiaries according to a properly executed and valid will or, when no will exists, to the people, agencies, or organizations requiredby state law.
Probate and Nonprobate Property
Figure 18.1 illustrates the different ways that your property can be distributed after your death. Nonprobate property, which does not go through probate, includes assets transferred to survivors by contract (such as naming a beneficiary for your retirement plan or with bank accounts owned with another person through joint tenancy with right of survivorship). Trusts can also be used to transfer assets outside of probate. The remaining probate property goes through the courtsupervised probate process of publicly administering the disposition of an estate. A decedent’s probate property consists of what
the decedent owned individually and totally in his or her name, as well as the value of assets jointly owned through tenancy in common. In the latter case, the heirs will receive the deceased’s share, but not the co-owner’s share. In some states, the decedent’s half of community property owned with a spouse is included in a person’s estate. Avoiding probate may save some costs (the probate process can charge a fee based on the net worth of the deceased) and time and maintain privacy (the probate process is public). Also, the probate process can take between 4 and 18 months. The proceeds of life insurance if payable to the estate of the deceased exactly the wrong thing to do (instead of being payable directly to beneficiaries) are included in one’s estate as well. While the beneficiary does not have to pay income taxes on the life insurance proceeds, the amount is included in a person’s estate for federal estate tax purposes if the deceased, while alive, retained any ownership interest, such as the right to change beneficiaries or to borrow against any cash value of the policy. Assigning ownership of the policy to someone else, such as the beneficiary, prior to death solves this problem.
Transfer Your Estate by Contracts
Described next are three ways to transfer by contract most or all of one’s estate. (Trusts are a special form of contract that is discussed later in this chapter.) Transferring your estate by contract is an easy do-it-yourself project. You just have to take a few minutes of time to fill out the appropriate forms.
1. Transfers by Beneficiary Contract Designation The forms one fills out to open investment accounts or title certain assets often require a named beneficiary. Examples are IRAs, 401(k) plans, Keogh plans, bank and credit union accounts, stock brokerage accounts, mutual funds, and life and disability income insurance policies. A beneficiary is a person or organization designated to receive a benefit. A beneficiary designation is a legal form signed by the owner of an asset providing that the property goes to a certain person or organization in the event of the owner’s death. The form also contains a place to designate a contingent (or secondary) beneficiary in case the first-named beneficiary has died. If no one has been named as beneficiary for a particular asset or if that person and a named contingent beneficiary have died, the property will go to one’s estate and to probate court for distribution. Retirement plan administrators are required by the Employee Retirement Income Security Act (ERISA) to pay benefits in the plan to the beneficiaries identified in the plan documents. Some people leave retirement savings to parents or siblings and never update the forms. If the employee dies without changing the beneficiary, an exspouse might inherit all of the plan assets, even if state law views his children as the rightful heirs. Keeping your beneficiary designations current is extremely important, particularly if you become a parent or get divorced or remarried. Divorce does not terminate an ex-spouse’s status as the named beneficiary of a retirement plan or a life insurance policy.
2. Transfers by Property Ownership Contract Designation Joint tenancy with right of survivorship is the most common form of joint ownership, especially for husbands and wives. In this case, each person owns the whole of the asset, such as a bank account or home, and can dispose of it without the approval of the other owners. Assets owned in this way can include bank accounts, stocks, bonds, real estate, mutual funds, government bonds, and virtually any other type of asset. Upon the death of one owner, the surviving owners receive the property by operation of law rather than through the provisions of a will. Simply stated, the surviving owners owned the entire asset before the death and own all of it after death.
3. Transfers by Payable-at-Death Contract Designation It is often impractical, undesirable, or inappropriate to own certain types of property using joint tenancy. For example, two elderly unmarried siblings might want each other to have access to funds in individual savings accounts earmarked to pay for their funerals but not have those accounts be available to the other sibling during life. They could, of course, designate each other as heirs in their wills. However, the funds would then remain tied up until the probate process is complete. To solve this dilemma, each could name the other to receive the funds upon their death using a payable-at-death designation for the account. To access the funds, the surviving sibling would simply need to present the death certificate to the bank and show proper identification, and access to the account would be granted.
Transfer Your Estate by Contracts
Described next are three ways to transfer by contract most or all of one’s estate. (Trusts are a special form of contract that is discussed later in this chapter.) Transferring your estate by contract is an easy do-it-yourself project. You just have to take a few minutes of time to fill out the appropriate forms.
1. Transfers by Beneficiary Contract Designation The forms one fills out to open investment accounts or title certain assets often require a named beneficiary. Examples are IRAs, 401(k) plans, Keogh plans, bank and credit union accounts, stock brokerage accounts, mutual funds, and life and disability income insurance policies. A beneficiary is a person or organization designated to receive a benefit. A beneficiary designation is a legal form signed by the owner of an asset providing that the property goes to a certain person or organization in the event of the owner’s death. The form also contains a place to designate a contingent (or secondary) beneficiary in case the first-named beneficiary has died. If no one has been named as beneficiary for a particular asset or if that person and a named contingent beneficiary have died, the property will go to one’s estate and to probate court for distribution. Retirement plan administrators are required by the Employee Retirement Income Security Act (ERISA) to pay benefits in the plan to the beneficiaries identified in the plan documents. Some people leave retirement savings to parents or siblings and never update the forms. If the employee dies without changing the beneficiary, an exspouse might inherit all of the plan assets, even if state law views his children as the rightful heirs. Keeping your beneficiary designations current is extremely important, particularly if you become a parent or get divorced or remarried. Divorce does not terminate an ex-spouse’s status as the named beneficiary of a retirement plan or a life insurance policy.
2. Transfers by Property Ownership Contract Designation Joint tenancy with right of survivorship is the most common form of joint ownership, especially for husbands and wives. In this case, each person owns the whole of the asset, such as a bank account or home, and can dispose of it without the approval of the other owners. Assets owned in this way can include bank accounts, stocks, bonds, real estate, mutual funds, government bonds, and virtually any other type of asset. Upon the death of one owner, the surviving owners receive the property by operation of law rather than through the provisions of a will. Simply stated, the surviving owners owned the entire asset before the death and own all of it after death.
3. Transfers by Payable-at-Death Contract Designation It is often impractical, undesirable, or inappropriate to own certain types of property using joint tenancy. For example, two elderly unmarried siblings might want each other to have access to funds in individual savings accounts earmarked to pay for their funerals but not have those accounts be available to the other sibling during life. They could, of course, designate each other as heirs in their wills. However, the funds would then remain tied up until the probate process is complete. To solve this dilemma, each could name the other to receive the funds upon their death using a payable-at-death designation for the account. To access the funds, the surviving sibling would simply need to present the death certificate to the bank and show proper identification, and access to the account would be granted.
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