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Example 1:Many married couples hold title to their assets in a form that conveys a right of survivorship. However, some assets, such as IRAs, must be held in a single individual's name and cannot be jointly-owned. Thus, while ownership with right of survivorship is a common and convenient probate avoidance tool, it is often only one aspect of an estate plan. There are two other non-probate transfer mechanisms that may be utilized for certain assets.
Tyler and Julie are a married couple who have lived in California throughout their lives. They bought their home many years ago and took title as "Tyler Jones and Julie Jones as community property with right of survivorship." Upon Julie's passing, the family's estate attorney prepares a new deed reflecting Tyler's 100% ownership, presents the death certificate to the county recording office and files the new deed. Because of the right of survivorship, probate court administration is not required to complete this change of ownership.
Example 2:Although many assets such as brokerage accounts, real estate and business entities can be transferred into a trust, retirement accounts must be held in the account owner's name. As such, an account owner is barred from transferring his or her retirement account into a trust during his or her lifetime. Fortunately, retirement accounts have beneficiary designations that allow for the bypass of probate in lieu of joint ownership or trust ownership.
Sally's attorney drafts a revocable living trust and explains the need to transfer certain assets to the ownership of the trust. After signing the trust document, Sally contacts the custodian of her brokerage account to arrange for the change in ownership. She is asked to sign a form on the custodian's letterhead to authorize the change of the account owner from "Sally Duncan" to "Sally Duncan, as trustee of the Sally Duncan Revocable Trust."
After Sally's passing, the successor trustee is authorized by the trust document to assume possession of the brokerage account and distribute the proceeds among Sally's nieces and nephews. The successor trustee is permitted to carry out these arrangements without approval of the probate court.
Example 3:A properly executed beneficiary designation will facilitate the non-probate transfer of the asset on the owner's passing. This feature means the asset can potentially be transferred to the beneficiary directly, without being subject to the probate court administration process. Minimizing the need for probate administration may save time, costs and complication for the decedent's estate and its beneficiaries, such as family, friends and nonprofits. Setting up a beneficiary designation for an IRA or other qualified retirement account does not incur any cost or require an attorney's assistance.
Terry worked in the software industry for many decades. Upon his retirement he sought the assistance of his financial advisor to roll over his sizable employer-sponsored 401(k) plan to an IRA with a new custodian. Once the rollover was completed, Terry's financial advisor presented him with a beneficiary designation form to complete and sign. Terry filled in the document as follows:
BENEFICIARY DESIGNATION FORM
Account Owner: TERRY THOMPSON
Account #: xx-xxxxxx
Primary Beneficiary/ies: 100% to KASEY THOMPSON (wife) Secondary Beneficiary/ies: 40% to CARL THOMPSON (son), per stirpes 40% to ANDREW THOMPSON (son), per stirpes 20% to SMALLTOWN ANIMAL SHELTER
The form also included the beneficiaries' contact information. At the time of Terry's passing, Kasey had predeceased him and Terry had failed to update his beneficiary form. Carl had also passed away five years prior in an accident.
Due to the per stirpes designation on Terry's beneficiary form, Carl's two living children, Caitlin and Meghan, were entitled to split Carl's 40% share equally between them. After receiving notification of Terry's death and confirmation that Kasey and Carl had predeceased Terry, the custodian transferred 40% of the IRA to Andrew, 20% each to Caitlin and Meghan and 20% to the Smalltown Animal Shelter, a qualified nonprofit. It was not necessary for the probate court to approve this distribution because of the beneficiary designation form on file for the IRA.
Example 4:Setting up an appropriate beneficiary designation for a retirement account can facilitate its transfer and create a more favorable distribution schedule for the remainder beneficiary. If a spouse is named as the beneficiary of a retirement account, the spouse will typically have the option to roll over the account to themselves. This inherited IRA rollover option enables the spouse to take required minimum distributions from the account over his or her own life expectancy. For a recipient of a traditional retirement account, this life expectancy distribution schedule will permit the beneficiary to pay the associated income taxes over an extended number of years. A non-spouse beneficiary who is named on a retirement account beneficiary designation is generally subject to a ten-year distribution period.
Sydney worked for many years as a psychology professor at the local university. As part of her compensation package, her employer contributed a portion of her paycheck into a 403(b) retirement account for her benefit. Upon her departure from the university, Sydney rolled over the 403(b) account into an IRA. Since the balance was relatively small compared to her other investment accounts and real estate holdings, Sydney monitored the balance but did not think much more of it. Since her other assets and the bulk of her wealth were owned jointly with her husband, Gerald, she felt confident that if something happened to her, Gerald would have unfettered access to the family finances.
Earlier this year, Sydney passed away at age 68. Gerald sought the assistance of an estate planning attorney to help settle her estate. Gerald recalled Sydney mentioning the IRA and was able to locate a recent statement from the account. The attorney contacted the IRA custodian and was informed that no beneficiary designation had been set up. The attorney informed Gerald that in the absence of a beneficiary designation, the IRA would need to be transferred through the probate court process. Until the probate court gave its approval, the funds in the account would not be accessible to anyone.
The estate attorney hired to administer Sydney's estate called Gerald with an update. The attorney informed Gerald there was a date on the court calendar for the probate proceedings to begin. Gerald wanted to know if he would have to take Sydney's IRA as a lump sum once the probate proceedings concluded, or if he had a more favorable option to delay taking payments or stretch them out for a period of time.
The attorney explained to Gerald that in many cases, a surviving spouse can roll over an IRA inherited from a spouse and then take required minimum distributions based on the surviving spouse's life expectancy. However, for this to be possible, the surviving spouse must be named as the primary beneficiary of the account. Since the account was not designated directly to Gerald, but rather would have to pass through Sydney's estate, Gerald could not utilize the spousal rollover option. As a result, the IRA would need to be fully distributed within five years of her passing with the income taxes paid accordingly.
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