In comparing stories and ways that we can assist clients, we discovered that the biggest hurdle that we face is with respect to titling of assets. To understand the problem, you must realize that the following are examples of things generally trump whatever you put in your Will or Trust:
- Life insurance beneficiary designations;
- IRA/401k/403b and other retirement beneficiary designations;
- Annuity beneficiary designations;
- Owning real estate as husband and wife;
- Owning real estate with a survivorship clause;
- Owning real estate with a life estate;
- Having someone on your bank account as a Pay on Death (POD) or Transfer on Death (TOD) beneficiary;
- Owning a bank account or brokerage account jointly with someone;
- Contractual agreements (such as a buy-sell agreement or divorce decree);
- Joint ownership of cars and other vehicles; and
- Joint ownership of bonds.
So, to put this another way, if you have two children from a previous relationship and are married to a new spouse, you may want 1/3 to go to each of your two children, and 1/3 to your spouse. Well, even if you have a Will which says 1/3 goes to each person, this will not happen if some of your assets name a beneficiary or are in a joint account with someone.
Let's say in the example above Husband is the parent to 2 children and he owns the following: A $400,000 house in New Jersey with Wife (who has no children), a $1,500,000 apartment in New York in just his name, a business worth $10,000,000 owned 70/30 with a partner, a 401k worth $3,000,000 naming his wife the beneficiary, a life insurance policy worth $1,000,000 naming his wife as a beneficiary, a brokerage account in his name worth $2,000,000 and a checking account with Wife worth $100,000. Accordingly, the Husband has a net worth of $15,000,000. (I'm only including $7M of the $10M business.) It is Husband's desire to give $5M to each.
Without any additional planning and assuming that Husband and business partner have no agreement in place, a Will that leaves everything 1/3 to each child and Wife has the following consequences:
1) The Wife would get the NJ house, the 401k, the life insurance, plus the joint checking account for a subtotal of $4,500,000. Additionally, she would receive 1/3 of everything else (another $3,500,000) for a total of $8M.
2) Each of the kids would receive $3,500,000 of assets - far less than what H intended.
3) The business would be owned 23.33% by each of the children, 23.33% by the Wife and 30% by the business partner.
Unfortunately, however, life is usually even more complicated than this! Frequently, there is a divorce agreement that might require that the life insurance be payable to the children. Sometimes either the surviving spouse or the child is named as executor - and then the surviving spouse does not get along with the children.
Because these situations are so complex, they are very likely to result in estate litigation. To minimize the costs of an expensive an hostile administration, it is very important to understand that title of assets frequently overrides what a Will or Trust might state and plan accordingly.