Remember the song written and recorded in 1956 by Bo Diddley called "Who Do You Love"?  I'm sure this is the number one thought on your mind when you are setting up your estate and deciding who will be on the receiving end of that estate when you pass away.  Who will inherit your assets, what will they inherit, and when will they inherit it are important and sometimes irrevocable decisions that are often difficult to make and even more difficult to accomplish.  The distribution of your assets is one hundred percent based on how you title each security, brokerage account, mutual fund, real property, etc.  The titling of your accounts indicates the current ownership of the asset, but can include the future ownership of the same asset.  

The most common form of titling an asset is an individual name or joint ownership.  Putting one name on anything means that one day someone will have to go to probate when that individual dies.  Ninety percent of the time, individual names should be avoided if the asset is going to pass to a spouse as the same asset will have to go through two separate probates.  Joint ownership is most common with spouses and means the asset automatically belongs to the survivor if one spouse dies. Probate, however, is just delayed until the death of the second spouse.  

The real problem lies in leaving assets to your children, grandchildren, or non-related persons.  By adding a non-spouse to an established account, you ultimately gift half of the asset to that person, and in the case of very large estates, this can trigger a gift tax.  An alternative option is to add additional wording to your title such as payable on death (POD), transfer on death (TOD), or in trust for (ITF) in order to bypass probate for a non-spouse beneficiary instead of making them a joint owner.

The distribution of assets doesn't stop at how accounts are titled.  It also includes the all important beneficiary designation on life insurance policies, annuities, and retirement plans.  These assets can totally avoid probate as long as beneficiaries are listed properly.  For example, listing "According to Will" or "Estate" on the primary beneficiary line (I've seen this too many times) will cause these assets to go to probate.  Retirement plans need even more careful consideration as certain IRS rules regarding stretching them over a beneficiary’s life expectancy require following certain guidelines.  

Naming your spouse as primary beneficiary or joint owner, naming your children as primary or secondary beneficiary, or putting POD, TOD, or ITF on an account has their own disturbing issues.  The biggest problem is the issue of disinheriting your grandchildren.  For example, let's assume you have a son and a daughter, who will inherit fifty percent of your estate, and each have children of their own.  They are listed as equal beneficiaries on an account.  If your son predeceases you and you do not change the beneficiary designation, one hundred percent of that account will go to your daughter at your death, leaving nothing to your son's children.  One way to avoid this issue is to put the words "per stirpes" next to each beneficiary's name if you want their share to pass to their children in the event of their premature death.  

You may think that this article is a little basic and falls under Estate Planning 101, however, my motivation comes from seeing many, many large estates that do not even cover the basics in their planning.  Of course, the larger the estate the more complex the titling and asset ownership may need to be by using a myriad of trust planning options.  No matter how much you think you may have covered all the issues, the biggest mistake I see is not updating titles and beneficiaries when things change.  When a spouse becomes ill or passes away, you may not be thinking about updating your legal documents and designations until it is too late. Then "Who Do You Love" goes right out the window and property may go to unintended heirs.   

Proper titling of your assets or proper "funding" of trusts requires the expertise and collaboration of an experienced estate planning attorney and tax and financial advisors.  Good legal documents and constant periodic reviews are crucial to creating a successful estate plan that will transfer your wealth to your loved ones according to your wishes.

Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Management Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten Easy Tests for Finding the Best One. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit www.daviswealth.com, or email: rdavis@daviswealth.com.

“Davis Wealth Management Group, an independent firm with securities offered through Summit Brokerage Services, Inc.  Member FINRA & SIPC, and advisory services offered through Summit Financial Group, Inc., a registered investment advisor.”

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