Many times I have had clients ask about having a child named as a Joint Tennant with right of survivorship on an investment or banking account. The reasons the client cites is usually to provide liquidity for the estate, avoid probate, and have someone who can access funds should they not be able to write checks for a period of time. I will generally discourage this as it can cause problems with the final disposition of assets and leave the clients vulnerable to divorce or other legal proceedings.
An often overlooked tool is called Transfer on Death (TOD). Many states have adopted laws that enable individuals to transfer assets by contract rather than by will, which greatly simplifies final distributions for heirs. For a complete list of states that have adopted the Uniform TOD Securities Registration Act you can look here.
A TOD account allows you to specify beneficiaries for each account you may have that is registered in your name. You may specify a different percentage ownership for each beneficiary. Upon your death the assets in the TOD account will transfer to the named beneficiaries without the delay of probate, and separate from other items in your will. You can make changes to the beneficiaries and their percentage participation whenever you choose. There is usually no additional charge for having the TOD designation added to your account, but not all institutions may offer this type of account, so be sure to ask.
For banking accounts you should know about the Pay on Death designation which works in a similar fashion, and also avoids probate. Again, ask your banking institution if they offer this account.
If you need someone who can write checks and pay bills for you if you become incapacitated you should have an attorney draw up a Durable Power of Attorney.
Per Stirpes is a term you must learn about in order to build a successful estate plan. It is a Latin term meaning "per branch". Sometimes it is omitted from beneficiary forms, wills, and trusts with sometimes devastating consequences.
Per Stirpes is an important term because it indicates how property should be distributed in the event of a deceased beneficiary or heir.
For example let's say you have a son and daughter who each have two children of their own. You have an IRA which you wish to leave to your children in equal shares. If you have indicated this on the IRA beneficiary form you may think all is well. However, suppose your daughter is traveling with you when you both die in an automobile accident. What will happen to the assets in the IRA?
Without the per stirpes indication your son will inherit all the assets in the IRA, leaving your grandchildren from you daughter with no share. If, however, you included the per stirpes designation on the beneficiary form, your surviving son would inherit his half of the IRA, and your daughters heirs would inherit the other half of the assets. This dramatic difference is due to those two small words - per stirpes.
The lesson is to be sure to review your beneficiary forms for IRA's, insurance policies, employee retirement plans, wills, and trusts to be sure your assets transfer according to your wishes when you are no longer here to explain your intent.
Assets can transfer to your heirs in one of two ways when you die. They can transfer by will, which includes probate court and public filing of related documents, or they can transfer by contract.
The advantages of having your assets transfer by contract include:
Examples of assets that transfer by contract include accounts or assets titled Joint Tenants with Right of Survivorship, Transfer on Death and Pay on Death accounts, Life Insurance and Annuity contracts, Trusts, and your IRA and 401k accounts if you complete the beneficiary forms correctly.
When you first establish an IRA or 401k, an annuity or life insurance contract, you are provided a form to name beneficiaries. If you fail to complete these forms the assets will usually pass back into your estate and become part of the probate process. By naming a beneficiary or beneficiaries you can let these assets transfer by contract. You should also name contingent beneficiaries and choose whether you want the assets to transfer per stirpes or per capita. By filling out these beneficiary forms you are insuring that your wishes are honored after your death.
Many people name only a spouse as a beneficiary. If the couple have children or grand children they wish to provide for they should consider making them contingent beneficiaries to preserve the tax benefits of an IRA (however if the children or grandchildren are minors be sure a guardian has been named or the funds will be encumbered until the courts name a guardian).
Currently only surviving spouses can transfer assets from their deceased spouse's 401k to their own IRA, but the recently enacted Pension Protection Act of 2006 will extend that privilege to any beneficiary after 2007.
The bottom line is beneficiary forms are an integral and important part of your estate plan. Choosing the right way to transfer these assets can save time and money, but can also be confusing. If you are unsure how to proceed choose a professional to help you, but don't delay.
Many of us worry, with good reason, that we might one day become incapacitated and unable to attend to our own affairs. How can we be sure our bills are paid, our investments are managed, or our property sold if the need arises?
A power of attorney is a document that delegates legal authority to another person. You may be familiar with a limited non durable power of attorney from attending a property closing when one of the parties is absent. The Power of Attorney allows the principal (person granting the Power of Attorney) to name an Attorney in fact (the person to whom the legal authority is being delegated) to sign documents to effect a property closing on their behalf.
Non Durable Powers of Attorney can be granted for a wide variety of tasks, and they remain in effect until canceled by the Principal or until the Principal becomes incompetent or dies.
A durable Power of Attorney is often granted between spouses or between a parent and a trusted child or other relative. The durable Power of Attorney as the name implies enables the Agent to act on the Principals behalf even if the Principal becomes mentally or physically incompetent. This is an important distinction. Should the Principal become incompetent through disease such as Alzheimer's or as the result of an accident or illness, there is someone in place who can make legal decisions, access funds, and pay bills on behalf of the Principal. As with non durable POA's a durable Power of Attorney ends when revoked by the Principal or when the Principal dies.
If you have not executed a Durable Power of Attorney and you become unable to handle your own affairs your family will probably have to go to court to have you declared incompetent - a very public airing of a very private matter. The court must then appoint someone, maybe not the person you would choose to handle your affairs. Sometimes a bond must be posted, an attorney or CPA hired to prepare detailed financial reports that must be filed with the court, and the court must give permission for certain transactions like the sale of real estate. All of this can be a long and expensive undertaking that can easily be avoided with proper planning.
You should consult with an attorney to have this important estate planning document prepared in accordance to your wishes and personal situation. You also should be sure to update the document from time to time. If a Power of Attorney is over three years old your agent could run into problems with some financial institutions refusing to honor it because of a concern it may have been revoked. Your attorney should be able to guide you.