With or without an estate plan in place, there are nine ways your assets legally pass onto your heirs. Depending on your estate plan, the process can involve little or no hassle—or it can be a major legal headache.
1. Intestate. To die "intestate" means to die without a will. Property in your name at your death is considered probate property and will pass according to your state's intestacy statute, which provides who your legal heirs are. Generally speaking, your legal heirs are your spouse; if there is no surviving spouse, then your children; if there are no surviving children, then your parents; if there are no surviving parents, then your siblings; and so on. Your family will have to go through the probate process to transfer your property to your legal heirs, and the probate court must approve the final distribution.
2. Will. To die "testate" means to die with a will. The legal process is generally the same as dying without a will. The only difference is that your state's intestacy statute does not control who your legal heirs are; instead, your will specifies who your legal heirs are. As with dying intestate, your family will have to go through the probate process to transfer your property to your legal heirs, and the probate court must approve the final distribution. If you accidentally or intentionally omit a beneficiary, they have the opportunity to challenge the validity of the will or to claim a portion of your estate.
3. Living trust. A "living trust" is a trust made during your lifetime. Your trust may be revocable or irrevocable, depending on the purpose it serves. The most common trust is the Revocable Living Trust, which avoids the probate process. This is ideal for those concerned with putting their loved ones through the probate process, which can be costly and time-consuming. Your revocable living trust specifies who your heirs are, who is in charge of your assets, and under what conditions distributions may be made to your beneficiaries. The trust's distribution provisions—which name your heirs and their portions of inheritance—become irrevocable upon your passing.
4. Testamentary trust. A "testamentary trust" is a trust made through your will. Your assets pass first through your will, then into your testamentary trust by specific language in the will. Your family will have to go through the probate process to transfer your property to your testamentary trust, and the probate court must approve the final distribution.
5. Contract in lifetime. A classic example of a contract in lifetime is a buy-sell agreement for partners in business. Upon the death of one of the partners, the buy-sell agreement specifies that the deceased partners' share is purchased from the estate by a third party, normally a surviving partner or the business itself. A contract in lifetime is not subject to probate and is conducted according to the terms of the contract. Another example is a contingent-owner designation of a third-party-owned life insurance policy. If the owner of the policy passes away before the insured passes away, ownership automatically transfers to the contingent owner and is not subject to the probate court.
6. Beneficiary designations. The best examples of beneficiary designations are life insurance policies, annuities, qualified retirement plans, individual retirement accounts, non-qualified deferred compensation benefits, and transfer on death designations of non-qualified investment accounts. all of these accounts will pass to the named beneficiary upon the death of the account owner and are not subject to the probate court. The designated beneficiary may be an individual or a trust, although it is recommend to consult with your attorney before naming a trust as the beneficiary of a qualified retirement account.
7. Joint tenancy with right of survivorship. When real estate is held as joint tenants with right of survivorship, the deceased owner's share passes automatically to the surviving owner without probate. This may be ideal for married couples, although it typically is not ideal for non-related owners or for a widow and his or her children, both for tax purposes and because of unintended consequences (for example, precluding grandchildren from inheriting if their parent predeceases you).
8. Qualified disclaimer. No heir is required to accept an inheritance. If the designated recipient of any type of property declines to accept the inheritance, they can make a qualified disclaimer within nine months of your death. The property then will pass to the remaining beneficiaries of your probate estate or the contingent beneficiaries of your non-probate estate, depending on the type of asset disclaimed.
With proper estate planning, the easiest ways to pass your assets upon your death—such as a living trust, contract in lifetime, and a few others—can be taken care of ahead of time so you have the certainty of knowing what your family will need to do.
Enjoy this article? Receive email alerts when new articles are available. Just click on the "Subscribe" button above.