How do our things pass?
Economizer Original Special Edition #121925
Isabella Mary Beeton (1836-1865) woke a book titled The Book of Household Management. In it she says, “A place for everything and everything in its place’’.
It seems what might be common sense is no longer so simple or common.
Repeat after me - Keep your stuff in order. Ensure everything is in order because it does not always mean it is correct.
Most people think it is smooth sailing because they have everything in labeled binders or file folders. Although helpful, this thinking is most often faulty. Family members can easily get overwhelmed when going through and trying to sort out even well-laid directions.
It becomes almost impossible to sort out disorganized or incomplete records; even organized records may not work if they are a few years old. Most often, they are daunted in handling certain accounts properly. Timing and proper understanding, especially when retirement accounts are involved, are critical to allow all the benefits to become available.
One missed deadline or improper titling can result in hundreds of thousands in lost growth and additional taxes. For example, IRAs and 401(k) plans follow similar rules for some parts but not all of them.
Let’s take a moment to see how things pass to others. Most commonly, our things can pass four ways:
Will
Ownership
Contract
Beneficiary
The lack of understanding of “how things pass” rules can cause much discord in families. Unknowingly, this lack of basic understanding can become a great financial boon to the waiting IRS. The super-rich know this and have taken steps to keep the IRS at bay
For most of us, to correct a problem, one must first understand that we have a problem. In other words, we have to get to the truth.
Let us look at how our things transfer to others at our passing. We will start with the most familiar method (one that everyone should know).
1) Passing by Will
In its basic form, it allows our assets to pass from the owner to another person. It is really straightforward and is used quite frequently. A quick search on the internet will give you your state’s requirement for doing a will at no cost. The will’s benefits are:
Pretty simple,
Low-cost method of transfer (especially in NJ) not all states are probate friendly. However, rules can change.
Some downsides are:
all wills become public record,
are contestable
and can be bypassed.
(Although you can legally do all your documents (as I do). I cannot advise you to do the same. For a complete understanding of wills and how things pass, please consult a licensed attorney in your home state. If you want to keep the costs down, there are state-specific software programs that can be purchased
How else can things pass?
2) Passing by Ownership
Let us take two spouses, for example. Together they purchased a home, and the house’s deed is in both names (joint tenancy). At the death of one spouse, the surviving spouse now owns the home entirely. This asset (the house) did not have to pass through probate, nor was it controlled by the will.
Even though the will may dictate that all assets go to someone else, the home passes to the other owner, bypassing the direction of the will.
(Please note that Tenants in Common is different, and the asset could be transferred by will. There are valid reasons why married individuals may want to use this method).
Another typical example of passing assets by ownership is an adult child added to a parent’s bank account. The purpose of doing this can be pretty innocent, allowing the adult child to do banking on behalf of the parent or assist in bill paying. At the parents’ passing, the adult child whose name was on the account now owns the account wholly, bypassing the will entirely. If there are other children and the parent’s choice states that all children share; equally, all other assets are transferred except the bank accounts. These accounts now belong entirely to the child whose name appeared with the parent.
You can see why being uninformed may cause problems in various cases, especially in second marriages or by accidentally disinheriting a child or children.