How wealth actually transfers: What your documents don’t control.
When you think about estate planning, you may think of the recommended documents – wills, trusts, powers of attorney, and beneficiary forms. While these documents are very important, the documents themselves do not ultimately determine where your assets go.
There are really three things working behind the scenes:
- How certain accounts are governed by contracts. Such as retirement accounts and life insurance policies with beneficiary designations.
- How assets are titled or owned. They may be owned jointly, individually, or have a TOD/POD registration.
- Everything that falls under your will or trust, if it doesn’t already have a built-in transfer method.
Each example operates differently, which can lead to disconnects. Estate planning documents may exist, but contract terms and asset titling might direct assets elsewhere.
Accounts that pass by beneficiary designation
Some of the highest valued assets you may own don’t pass through a will or trust at all. These assets may include:
- 401(k) and employer retirement plans
- Traditional and Roth IRAs
- Life insurance policies
- Annuity contracts
These accounts are governed by contract law, requiring the financial institution to distribute the asset to the named beneficiary on file at the time of death. In other words, the beneficiary designation provides the instructions, not the will or the trust.
This is also where a large portion of total household net worth typically exists, specifically retirement accounts. You save up for retirement your entire working life, and often, you don’t end up spending everything you saved for all those years. Which makes these designations extremely important from a planning perspective.
The most common issues that tend to show up are:
- Old beneficiaries who were never updated after life changes.
- Ex-spouses are still listed on retirement accounts or insurance policies.
- Missing contingent beneficiaries, leaving the account defaulting to the estate.
When that happens, the intended plan and the actual outcome can look very different.
Assets that transfer based on ownership structure
The next category is how assets are titled. This includes things like:
- Joint bank or brokerage accounts
- Transfer-on-death (TOD) or payable-on-death accounts
- Real estate ownership structures
Assets with these title structures transfer based on ownership. Joint accounts pass to the surviving owner; TOD/POD accounts go to the named beneficiary; individually owned accounts without a designation may go through probate.
- TOD/POD accounts pass directly to the named beneficiary.
- Individually owned accounts without a designation may be subject to probate.
Sometimes, parents may add their adult children as joint owners of an account to help manage day-to-day finances. While this is very convenient for both parties, the account will pass directly to the joint owner, rather than aligning with what’s stated in the will.
Assets governed by a will (probate assets)
Any asset that doesn’t have a beneficiary designation or is owned by one individual falls under the provisions of the will and is handled through the probate process. If assets are distributed under will provisions, the executor (personal representative) is responsible for filing the will and notifying the beneficiaries and heirs.
If an asset lacks a beneficiary designation and there is no valid will, the asset is distributed according to state intestacy laws. This means the state determines who inherits the asset. Typically, the decedent’s family receives these assets, but the court oversees the process, which can take a long time and be costly.
Other common estate planning issues
In practice, issues don’t always come from a lack of documents. They come from misalignment between the documents and how assets are actually set up. A few of the examples include:
- A trust document exists, but assets were never retitled to it. The trust is properly drafted, but the assets remain individually owned and therefore never fall under the trust’s instructions.
- “Default” beneficiary language is still in place. Some accounts never had a specific beneficiary selected and are set to default provisions such as “estate”. This can unintentionally push assets into probate and delay distribution.
- Out-of-state property not aligned with the primary estate plan. Real estate owned in another state often follows different probate rules. If it isn’t titled consistently with the rest of the plan, it can create a separate probate process in that state.
A proactive estate plan requires having all the recommended documents in place. But it’s also about ensuring these other areas align with your goals and wishes. If your entire estate plan isn’t coordinated, the result can differ from your original intent. You want to make sure everything you built during your lifetime is distributed and used in a way that benefits your family. Having the proper documents, asset titling/ownership structure, and beneficiaries on file are key elements to ensure your estate plan is executed properly.