Understanding the differences between various types of non-probate property
Jointly owned property
If you own property with another person as joint tenants with right of survivorship, that is, not as tenants in common, the property will pass directly to the remaining joint tenant upon your death and will not be a part of your probate estate. (It will, however, be a part of your taxable estate.) Frequently, people (particularly in old age) will cause bank accounts or securities to be placed in the name of the owner with one or more children or trusted friends as joint tenants with right of survivorship. This is sometimes done as a matter of convenience to give the joint tenant continuing access to accounts to pay bills.
It is important to realize that the ownership of property in this fashion often leads to unexpected or unwanted results. Disputes, including litigation, are common between the estate of the original owner and the surviving joint tenant as to whether the survivor’s name was added as a matter of convenience and/or management or whether a gift was intended. The planning built into a well-drawn will may be partially or completely thwarted by an inadvertently created joint tenancy that passes property to a beneficiary by operation of law, rather than under the terms of the will.
Many of these problems are also applicable to institutional revocable trusts and “pay on death” forms of ownership of bank, broker, and mutual fund accounts and savings bonds. Effective planning requires knowledge of the consequences of each property interest and technique.
The term trust describes the holding of property by a trustee (which may be one or more persons or a corporate trust company or bank) in accordance with the provisions of a written trust instrument for the benefit of one or more persons called beneficiaries. A person may be both a trustee and a beneficiary of the same trust. A trust created by your will is called a testamentary trust and the trust provisions are contained in your will.
If you create a trust during your lifetime, you are described as the trust’s grantor or settlor, the trust is called a living or inter vivos trust, and the trust provisions are contained in the trust agreement or declaration. The provisions of that trust document (rather than your will or state law defaults) will usually determine what happens to the property in the trust upon your death.
A living trust may be revocable (subject to change and terminated by the settlor) or irrevocable. Either type of trust may be designed to accomplish the purposes of property management, assistance to the settlor in the event of physical or mental incapacity, and disposition of property after the death of the settlor of the trust.
Trusts are not only for the wealthy. Many young parents with limited assets choose to create trusts either during life or in their wills for the benefit of their children in case both parents die before all their children have reached an age deemed by them to indicate sufficient maturity to handle property. This permits the trust estate to be held as a single undivided fund to be used for the support and education of minor children according to their respective needs, with eventual division of the trust among the children when the youngest has reached a specified age. This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their level of maturity or individual needs at the time of such distribution.
Much has been written recently regarding the use of “living trusts” (also known as a “revocable trust” or “inter vivos trust”) as a solution for a wide variety of problems associated with estate planning through wills. Some attorneys regularly recommend the use of such trusts, while others believe that their value has been somewhat overstated. The choice of a living trust should be made after consideration of a number of factors.
The term “living trust” is generally used to describe a trust (a) which you can create during your lifetime, and (b) which you can revoke or amend whenever you wish to do so. You can also create an “irrevocable” living trust, but that is permanent and unchangeable and is almost exclusively done to produce certain tax results beyond the scope of this summary.
A “living trust” is legally in existence during your life, has a trustee who is currently serving, and owns property which (generally) you have transferred to it during your life. While you are living, the trustee (who may be you) is generally responsible for managing the property as you direct for your benefit. Upon your death, the trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries. Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also (a) provide you with a vehicle for managing your property during your life, and (b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose.
Annuities and retirement benefits
You may be entitled to receive some type of retirement benefit under an employee benefit plan offered by your employer or have an Individual Retirement Account (IRA). Typically, a deferred compensation or retirement benefit plan will provide for the payment of certain benefits to beneficiaries designated by the employee in the event of the employee’s death before retirement age. After retirement, the employee may elect a benefit option that will continue payments after his or her death to one or more of the designated beneficiaries. Certain spousal annuities are now mandated by law and may be waived only with the spouse’s properly witnessed signed consent. The various payment options will be treated differently for tax purposes. Any person entitled to retirement benefits should seek competent advice as to the payment options available under his or her retirement plan and the tax consequences of each.
If you own life insurance on your own life, you may either (a) designate one or more beneficiaries to receive the insurance proceeds upon your death, or (b) make the proceeds payable to your probate estate or to a trust created by you during your lifetime or by your will. If the insurance proceeds are payable to your estate, they will be distributed as part of the general estate in accordance with the terms of your will or, if you die without a will, the distribution will be according to the applicable laws of intestate succession. If the proceeds are payable to a trust, they will be held and distributed in the same manner as other trust assets and may also be free of creditors’ claims. Insurance proceeds that are payable directly to a minor child will generally necessitate the court appointment of a legal guardian or conservator. This can be avoided by having a trust designated as beneficiary or a custodial account under the state-transfers-to-minors law.
Insurance plays an important role in estate planning and should be coordinated with all other aspects of your estate plan. The laws pertaining to the taxability of insurance proceeds are complex, however, so it is important that all matters pertaining to life insurance be carefully reviewed with your attorney and insurance advisor.