How you own your assets can derail your estate plan. Best to check that your “titling” and legal documents are in sync.
It sounds easy. You and your spouse have assets, like a primary residence, a beach vacation home, a ski condominium, an antique car collection, some artwork and other personal property, as well as a small insurance policy—plus funds in retirement plans and investments.
You go to an estate planning lawyer and draw up a will (and perhaps a revocable trust). What you want to happen, if you die first, is for your personal property and primary residence to go to your spouse; your beach vacation home, ski condominium and antique car collection to go to your daughter, Sarah, from your first marriage; and the artwork to go to your donor-advised fund. Whatever is left over will pass outright to your current spouse and Sarah in equal shares. You also intend for your spouse to get the proceeds of the insurance policy and your retirement assets.
There, you’ve taken care of your family, right?
Well, not exactly.
Like many people, your plans may be derailed by a problem that is relatively easy to fix—if recognized in time: Uncoordinated ownership and estate planning documents.
So, how DO you own your assets? Do you own them alone? Does your spouse own any of these assets alone? Do you and your spouse own assets together, and if so, how? Are they owned by a trust? And how about the insurance policy and those retirement assets; what are the “beneficiary designations” for those assets?1
These are important questions—and the answers can satisfy or thwart your estate plan.
- Sole ownership of your primary residence, personal property and your investments means that they will pass according to your will. Fortunately, your will provides that your personal property goes to your spouse. But your will also says everything else goes to your trust. That means your trust agreement governs what happens to your primary residence and your investments.
- Joint Tenancy with right of survivorship of your beach vacation home and artwork means that you and your spouse own these assets together. Regardless of what your will (or trust) says, if you die first, the law dictates that these assets will go to your spouse. That means no portion of the vacation home will go to your daughter, Sarah, and none of the art will go into your donor advised fund. Your will has no control over how your spouse chooses to dispose of these assets.
- Tenancy in Common can be any percentage split. It happens that you and your spouse each have a 50% interest as tenants in common of your antique car collection. That means if you die first, only your 50% of the car collection is going to your daughter. The other 50% remains with your spouse and she can dispose of it as she wishes.
- A trust governs only the assets to which it holds title. It is important to remember to transfer your primary residence, personal property and other assets into your trust (either during your life, or via your will at your death). Only then will the provisions of your trust actually control the disposition of your assets. Your trust received your personal residence and investments (through your will), but your trust document makes no mention of passing your home to your spouse. Instead, it divides all assets it holds equally between your spouse and daughter—which is not what you wanted.
- LLC ownership is frequently done for many valid reasons, including limiting what creditors may be able to reach. However, if you have assets in an LLC, keep in mind that it not only keeps out creditors but also walls the assets off from your will’s (or trust’s) instructions. In your case, you and your spouse each own 50% of an LLC that, in turn, owns your ski condominium. Even though your trust directs the ski condominium to pass to your daughter, it won’t, because the ski condo is owned by the LLC. You could pass your 50% interest in the LLC to your daughter under your trust, but she would own only half the LLC (which owns the ski condo). Your spouse still owns the other half of the LLC, which is not what you’d intended.
- Beneficiary designations on your insurance and retirement accounts will dictate who gets these assets; the will (or trust) does not control. Problem is, you did not update your beneficiary designations after your divorce and they still list your ex-spouse by name as the beneficiary. Your ex is grateful; your current spouse is not.
You can prevent these and many mistakes by taking a few steps with the help of your professional advisors:
- Closely examine who owns which asset, and how your wills and trusts are structured.
- Check the beneficiary designations for all your insurance policies and retirement plans. Make sure they reflect your wishes.
- Make sure that your ownership interests coordinate with your will’s (and trusts’, if applicable) provisions so that your property will be conveyed to your heirs as you intend.
- Repair any conflicts or inconsistencies with the help of your lawyers.
Your J.P. Morgan team is available to work with you and your other professional advisors to make sure your estate plan and balance sheet work together to carry out your wishes.
This article is part of an ongoing series called The Sound Estate Plan, which highlights common estate planning errors and how you can avoid them.
1In community property states, each spouse has the right to dispose of his/her half of a community property asset (as defined by state law) at death, regardless of title, so it is also important to coordinate proper titling of community property assets within your estate plan. Community property states include Arizona, California, Idaho, Louisiana, Nevada, Texas, Washington and Wisconsin. You may ‘opt-in’ to community property treatment in Alaska and Tennessee.