(And Why a Revocable Living Trust Is Often the Best Way)

Educating yourself is the first step to doing effective estate planning. Here is a statement that most people would agree captures their idea of what they want from an estate plan:

I want to . . .

  Control my property while I am alive;

  Reasonably and intelligently maximize my resources;

  Provide for my loved ones and me if I become mentally disabled;

 Get and rely on advice from professionals in a setting where I receive good and recognizable value in return for the price; and, at my death,

  Give my property to whom I want, when I want and the way I want, all at the lowest, possible, overall costs.

So, let’s start with a basic understanding of how property can be transferred at death. It’s not as simple as whether you should have a Will or a trust. What you want is to have your assets titled, and your beneficiary designations made, so that whatever you want to happen actually happens. There are four basic ways for title and ownership of property to be transferred at death:

  1. Ownership in your own name alone
  2. Joint ownership
  3. Beneficiary designations
  4. Revocable living trusts (and, perhaps, other kinds of trusts)

1. Ownership in Your Own Name Alone

If at your death you own property in your name alone, then the way ownership of that property is transferred to someone else is by a court process that declares and approves the transfer. This process is commonly known as “probate” or “probate administration.” Of course, the process is not as simple as going to the courthouse and getting an order signed by a clerk or judge. There are multiple steps in the probate process (and several types of probate). However, the only reason probate is even necessary is because the person who died, whether with or without a Will, had property in his or her name alone.

Many years ago, probate was the only way that title or ownership of property could be transferred at death. However, because of laws enacted by the legislature, we now have joint tenancy, beneficiary designations and living trusts. This means that having to use probate and court orders as the only way to transfer property is no longer the case.

If you have a Will, the court applies the terms of your Will to the property that is in your name alone, subject to the need for paying expenses, claims and taxes. A common misconception is that a Will can control property that is not in your name alone or which is not payable to your “estate” at your death. Please understand that a Will only controls property that is subject to the probate process. A Will does not control any property that is owned jointly with the right of survivorship or for which a valid beneficiary designation has been made to transfer or pay benefits on death. This is true even if the Will says, “I direct that all of my property should be distributed to…”. The phrase “all of my property” in a Will only refers to property that is subject to the probate process.

For various reasons, it is often good planning to avoid probate. Plus, there are many planning issues that have nothing to do with death. Therefore, a long and involved Will, or even what is sometimes called a “simple” Will, usually won’t accomplish all of your goals. However, a Will is always a necessary part of your overall planning.

Even with joint tenancies, beneficiary designations, living trusts, or a combination of all of these, you still need a Will directing the distribution of any property or interest in property that is not covered by one of those ways of transferring property. For example, if you have a living trust, it is still likely that not all of your property will be in the trust at your death. The purpose of the Will is to get it there. In essence, the Will would provide that all property not in your trust at your death is to be distributed to your trust. Or, if you have an insurance beneficiary designation and the beneficiary doesn’t survive you, the Will can direct what happens to that property. Other things can happen, too, that are beyond your control, no matter how well you plan. So, you can think of a Will as being like a spare tire—vital, but not the centerpiece of your planning vehicle.

2. Joint Ownership/Joint Tenancy with Right of Survivorship

Real estate, bank accounts and other investments such as mutual funds, stocks, etc., can be owned jointly with someone else. There are two ways that anyone can hold property jointly with someone else under North Carolina law, either as “tenants in common” or as “joint tenants with right of survivorship” (JTWROS). [There is a third way to own property in North Carolina, but it only applies to married couples who own real estate (i.e., land, houses and buildings). They can own that kind of property as “tenants by entirety,” which is a unique form of joint ownership with survivorship.]

If property is held jointly with the right of survivorship, it passes automatically to the survivor and is not controlled by Will. Also, it is not subject to probate administration of the first decedent unless there is no other property with which to pay the decedent’s expenses, claims and taxes. [Tenants by entirety property is never subject to probate.] Even motor vehicles can be titled as “JTWROS” property.

Tenancy in common is different. If you own property in two or more names, either with the right of survivorship specifically disclaimed or with no reference to survivorship [except in the case of real property deeded to spouses], each owner holds an “undivided” interest. At your death, your fractional interest is subject to probate administration, because that interest, or share, is all yours, i.e., in your name alone.

Joint tenancy with right of survivorship works best between spouses whose combined assets are less than the individual estate tax exemption equivalent amount. Joint tenancy, whether with or without survivorship, is not a good way to hold title to property with children. Not only might you trigger gift tax consequences to make your child a joint owner, but your child’s being a joint owner will certainly affect your ability to deal with the property without the child’s approval. It may also put the property at risk in the event of the child’s divorce, bankruptcy or other litigation, or the child’s death before your own death. Another adverse consequence, perhaps unwelcome, is the likelihood of the child’s having to pay income tax upon a sale if the property appreciates in value or, perhaps, someone’s having to pay a second gift tax if the property is later transferred other than by sale.

Finally, joint tenancy and beneficiary designations only work if people die in the “right” order. It will be too late to change the results when the “wrong” person dies first.

3. Beneficiary Designation, including Pay on Death and Transfer on Death

All sorts of property can be owned, registered and titled with a designated death beneficiary, payee or transferee. Life insurance policies, annuities, 401(k) plans, IRAs and other contracts often allow you to make a primary and even a contingent beneficiary designation. At your death, these assets are paid or transferred directly to the designated beneficiary.

By North Carolina statutes, you can have bank accounts and certificates of deposit set up as “pay on death” (POD) accounts. They simply “pay” to the designated beneficiary or beneficiaries upon the owner’s death. Other statutes allow you to set up stock certificates, mutual funds and other securities to “transfer on death” (TOD) to the designated beneficiary or beneficiaries.

When there is a living beneficiary to whom the property is to be transferred or paid to at your death, the property is not controlled by your Will. Also, it is not subject to probate administration unless there is no other property with which to pay your expenses, claims and taxes.

It is an important part of your planning process to understand the use of beneficiary designations and contingent beneficiary designations, particularly with “qualified” retirement plan benefits, such as 401(k) and IRA investments. Because of issues involving protection against creditors, plus issues involving income tax to the recipient at some point in time, it is crucial to understand when you should and should not make your estate or living trust the beneficiary.

4. Fully Funded Living Trust

For many clients, the best life, legacy and estate planning technique today is to use a living trust as the centerpiece of the plan. This type of planning, if done properly, can resolve all kinds of issues that otherwise would not be addressed. If you have a living trust, it is important to have certain property “owned by” or titled in the name of the trust. Also, beneficiary designations can be made directly to the trust.

If you own any property in your name at your death, which is very likely, instead of everything being owned by the living trust, such personally owned property will be subject to the probate process; so you should have a “pour over” Will to take care of that possibility. A “pour over” Will picks up property outside of the trust and “pours it over” into the trust. The trust provisions, not the Will, itself, then control what eventually happens to that property.

Here are some advantages of using revocable living trusts:

Like joint tenancies and beneficiary designations, probate of the trust property is avoided.

Unlike joint tenancies and beneficiary designations, all of the “what ifs” in those scenarios can easily be addressed (e.g., What if a beneficiary predeceases you? What if a beneficiary is too young or has special needs? What if a beneficiary has creditor or other litigation problems?).

Control remains within the family or, at least, with people or entities selected by you.

Issues of mental incapacity during your life can be addressed and handled more effectively than with powers of attorney.

Management and settlement processes remain private, both during life and after death.

Costs associated with settling an estate at death with a living trust are typically less than the costs associated with settling an estate through the probate process without a living trust.

Like the probate process, but minimizing the court’s involvement, a living trust provides a means through which expenses, claims and taxes can be satisfied.

Administration of trusts can begin and move along more quickly then the probate process, due to delays inherent in the court system.

Tax planning can be conveniently included in the trust plan.

For married couples, a “joint trust” may be an appropriate plan.

One of the best ways to educate yourself further is to work with knowledgeable professionals who have your best interests at heart. In fact, a “team approach” is ideal. When the professionals upon whom you are relying talk and work together to help you determine what is best for you, good things can happen.

We hope that this article has been helpful to you. If you have any questions or need assistance in any way, please contact us to see how we can be of service.