Property Passes at Death
Resources: How Property Passes at Death
Most people just don't understand how property passes at death. Everything does not pass according to the terms of the Will. More family problems are created by the failure to comprehend this aspect of estate planning than almost any other single factor.
Suppose mom's Will leaves everything to her three children in equal shares. As mom gets older, she takes her daughter, who lives in town, down to the bank and puts her daughter's name on all of her accounts with her. Of course, mom is doing that so that the local daughter can help her by paying her bills and writing her checks when mom becomes too sick to do so herself. What mom fails to understand is that at her death, all of the cash will pass to the local daughter because joint accounts don't pass under the Will.
If the daughter simply writes checks to her brothers to even out mom's cash after death, then she may very well be making a taxable gift and using up a part of her $1,000,000 lifetime federal tax free exclusion without knowing it.
To avoid this common problem, mom should give the local daughter a general durable power of attorney and leave her money in her name alone. The power of attorney should name a Stand-by which would be another child if the local child is unable to serve and the power of attorney may also authorize gifts. If gifts are not specifically authorized in the power of attorney, then they cannot be made.
In many cases, most of a person's estate will not pass under his or her Will, for example:
- IRAs, 401Ks, pension and profit sharing plans and other employee benefit plans pass to a named beneficiary.
- Life insurance is payable to a named beneficiary.
- Joint checking and savings accounts pass to the surviving joint depositor.
- Joint brokerage accounts and stock owned as joint tenants with right of survivorship pass to the surviving joint owner.
- Annuities pass to a named beneficiary.
- Stocks can be owned as pay on death (POD) or transfer on death (TOD) to a designated beneficiary.
In this situation, a diagram is very helpful. The picture should illustrate what happens if the husband dies first and what happens if the wife dies first. It should show who the proper beneficiaries are for life insurance, IRAs and so forth. It should show what property is being used to fund what trust, what benefits are payable from the trust to the surviving spouse, and how property passes at the second death. It should be easy to see when and how taxes will be paid. The diagram should also show whether charitable gifts are being made at the first death or at the second death and where the funds will come from to satisfy the charitable gifts.
In short, this is a situation where a picture is simply worth more than a thousand words. The examples above and many more are illustratived in the Diagramatic Guide to Estate Planning. If you would like a copy of guide (available in PDF format) contact JoVanna King at jovanna@clemson.edu.