Why is legal ownership so important in estate planning?

One of the most overlooked factors in estate planning is “legal ownership” and this is a huge mistake because if you don’t understand this concept, your entire estate planning process and your strategies can be worthless.

Here are some examples:

  • Joint ownership
  • Beneficiary designations
  • Owned by a trust
  • Owned outright by you alone

Let’s look at some examples of these and how they impact your desires and plans.

Joint ownership (with right of survivorship) trumps any other planning you have done

Your house you own with your spouse — we don’t look at your will or trust. Instead your spouse gets it automatically regardless of what your will or trust says.  This is fine — probably what you intended.

But let’s look at a bank account.

I had a lady tell me what time she had 4 girls — she wanted her (6 figure) CDs split equally.

That’s fine.

She had a will saying this.

That’s great.

But.

She had one child (the local one) on the CDs as a joint owner.  So when mom dies, what do we do with the CDs?

“Divide them in 4 with 25% to each daughter like I wanted?”

Nope.

The local daughter gets them all.  A will only applies to what is in your name only when you die.

These CDs were not in mom’s name only — instead they were jointly owned.

“But she will split the money evenly with her sisters so it is no big deal.”

Maybe.

Maybe not.

What if she is in the middle of a divorce, lawsuit, bankruptcy, etc.?

She won’t have the option to simply split the money because a creditor (or a predator) will have a claim to the money and so the family loses the asset protection because of legal ownership.

Legal ownership trumps your will and your trust because it never gets to the will or the trust — instead the local daughter owns the CDs.

What about keeping it in your name but using a beneficiary designation . . . .

How a beneficiary designation on an investment account, life insurance, IRA, etc. trumps your estate planning.

Whatever you have on this — i.e. whoever you have listed is the person who will get this money.

Regardless of what your will or trust say.

Here’s a recent example.  An 80 something year old man got married to a younger woman. The bulk of his assets consisted of an IRA. He intended for his kids to get it when he died and this is what he put in his will.

But he did not make this clear on his IRA beneficiary form — actually what he put on there was meaningless (something like “follow my will” which is not a proper designation) and he died a few months later.

The company holding the IRA went with the default rule which is it goes to his surviving spouse — his new wife.  So his IRA (hundreds of thousands of dollars) went to his new wife and not his kids. This is because your beneficiary designation (legal ownership) trumps your trust or will.

This is true also of life insurance and annuities — the beneficiary designation controls.

This is not good or bad — it is simply something that you need to know about as you consider your plan for what happens to your stuff when you die.

A will only controls stuff in my name only. If I own something jointly then the will doesn’t matter.

A trust only controls stuff that is in the name of the trust (actually normally in the name of the trustee).  Let’s look at this next . . . .

A trust only controls assets that are actually in the trust.

Think of a trust as a treasure chest.

A Trust is like a treasure chest

A Trust is like a treasure chest

 

The assets that are placed in the trust are controlled by the trust.  We simply look at the rule book — the trust document — to tell us what to do with the assets.

It may be to:

So if you want to have your trust do you any good, you must transfer assets into the trust.  You normally do this by transferring title to the asset — legal ownership — into the name of the trustee in his or her (or it if we are talking a corporate trustee) capacity as a trustee for your particular trust.

One of the dirty secrets of estate planning is the vast majority of all trusts are never funded — nothing gets put into the trust so you spent a lot of money on something that does you no good.

Tip — if you are going to have a trust created, make sure you fund it — make sure you put the assets into the trust so it will actually work!

Well, what about a will?  Let’s talk about this now . . . .

For assets in your name only, your will (or the State of Alabama’s will if you don’t have one) controls what happens to your stuff.

If you have an asset in your name only — with no beneficiary designation — then the only thing that will tell us what to do with that asset when you die is your will.

[Note:  If you don’t have a will, the State of Alabama provides one for you — it is called “intestate succession” which just means you died without a will.]

For example, you own your house with your husband.

He dies.

So we don’t look at anything else because you owned it jointly — so it is your house.

But then you die.

The house was an asset owned in your name only so we can only use your will.

To use a will, we have to go to probate court and go through a public legal proceeding to have the court accept the will, appoint an executor (the person who executes your desires in the will) and then do whatever you said to do in the will.  Normally to give the property to some beneficiary.

One final point — a will is meaningless until you die.  It has no power until you die.

This is nothing new — look at what the book of Hebrews in the New Testament says in Chapter 9, verses 16 and 17:

For where a will is involved, the death of the one who made it must be established. For a will takes effect only at death, since it is not in force as long as the one who made it is alive

Bottom line to legal ownership — make sure your estate plan meets your goals

So is a will better than a trust?  A trust better than a beneficiary designation?  Better than joint ownership?

No.

These are simply some of the tools we have in our tool box.  So we want to pick the right tool for the right job.  Or think of it this way — these tools are simply “vehicles” that you use to get where you want to go.

Maybe you need to fly.

Maybe you need to drive.

One is not better than the other but usually one is much more appropriate than the other.

If you would like us to help you figure out which tools or vehicles are the best for you in your unique situation, let us know.  If you have any questions about Estate Planning or Elder law (Medicaid, Special Needs, or VA Pension), feel free to give us a call at 205-879-2447 or contact us through our website.

John G. Watts
Watts & Herring, LLC
Birmingham and Madison Offices in Alabama
We represent consumers from all parts of Alabama

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