Estate Planning Tools to Transfer Assets After Death

Ben A. Neiburger, JD, CPABen A. Neiburger, JD, CPA
Neiburger Law, Ltd.
Elmhurst, Illinois
630-782-1766

Member of the national ElderCare Matters Alliance, Illinois chapter

Estate planning helps ensure your assets go to your desired beneficiaries after you pass away.  This article describes the tools, such as gifts, wills, beneficiary designations, trusts, and strategies that elder law attorneys use to create an estate plan.Elder law attorneys use the following tools and strategies to create an estate plan that helps ensure your assets go to your desired beneficiaries after you pass away.

GIFTS

One way to transfer assets to beneficiaries during a lifetime is to make a gift.  Seek the advice of a CPA or attorney before making any significant gifts because they can have important tax consequences.

The IRS imposes a gift tax, payable by the giver of the gift, for any gift in excess of $13,000 per person per year.

If your gift includes assets such as stock or real estate that may have increased in value since you purchased them, you might have to pay capital gains tax.

One special situation involves anyone who is seeking eligibility for assistance with long-term care costs from Medicaid.  (Rules governing this are explained later in this article).

JOINT ACCOUNTS WITH RIGHT OF SURVIVORSHIP

State laws may vary, but here are some considerations.

Under Illinois law, for example, a joint account automatically passes to the surviving joint owner when one owner passes away.  This is a very good way for married couples and committed life partners.

However, it is not usually good to name a child or any other person as a joint owner of your assets, for the following reasons:

  • If you name your child joint on a bank account, and the child gets divorced, it is possible that your funds in the account could be brought into the divorce proceeding.
  • If your child is sued for any reason, for example, because of a car accident, the assets in the joint account could be at risk in the lawsuit.
  • Assets in a joint account are not controlled by your will.  They pass automatically to the surviving joint owner, which could result in intended beneficiaries being accidentally disinherited.

BENEFICIARY DESIGNATIONS

Many assets, such as life insurance, IRA accounts, and certificates of deposit, allow you to name a “pay-on-death” beneficiary.  After you pass away, the asset subject to the beneficiary designation is paid directly to the named beneficiary.  This is a good, simple way to pass assets to a beneficiary.

Cautions

  • This method may not work well for multiple beneficiaries.
  • It is also not always clear what happens to the asset if a desired beneficiary does not survive you.

If you have multiple beneficiaries, consider passing the asset according to terms in your will, which allows you to clearly state what will happen to a particular asset in the event a beneficiary passes away before you.

Naming someone as the pay-on-death beneficiary of an asset does not subject your asset to the claims of your beneficiary’s creditors during your lifetime.  It also does not put your asset at risk if your beneficiary is involved in a divorce.  For this reason, a beneficiary designation may be a safer choice than a joint ownership designation.

However, if you have numerous accounts, each with a different group of beneficiaries, and then you want to change your estate plan, you will need to look at each account when making a change.

If you become ill and need to liquidate your accounts to pay for your long-term care, your agent must be careful which account is liquidated first, since that account may go to a specific beneficiary who will then be cut out of your estate plan.

Pay attention to beneficiary designations on retirement accounts because of tax considerations, such as for IRA and 401(k) accounts.

WILLS

A will specifies who will receive your assets after you pass away.  It allows you to appoint a personal representative to gather your assets, pay your bills and taxes, and distribute the remaining assets to your beneficiaries.

An attorney should prepare a will.  Do not use “will kits” or forms purchased from legal stationery stores.  It is too easy to make a mistake that could invalidate your estate plan.

The only disadvantage to having your assets pass to your beneficiaries according to the terms of a will is that your estate will have to go through probate, a court-supervised distribution of your assets to your beneficiaries.  (Probate and probate avoidance are discuss later in this article).

What happens if you die without a will?

If you pass away without a will, the State has a will for you.  The “state’s will” is referred to as “intestate succession.”  Under intestate succession, your assets pass to your “next-of-kins” in accordance with an order of priority set forth in state law.

An example of succession

  • If you are married and have no children, state law usually provides that your assets pass to your spouse.
  • If you have children, and your spouse passes away before you, your assets might pass in equal shares to your children.
  • If you have a spouse and children, your assets might pass one-half to your spouse and one-half to your children, in equal shares.
  • If you have no spouse, children, or grandchildren, your assets could pass to your parents.
  • If your parents predecease you, your assets could pass to your siblings.
  • If you have no relatives at all, assets pass to the County that you resided in on your death.

Even if the beneficiaries under intestate succession would be the same as your beneficiaries under a will, you should still sign a will.  the administration of an “intestate” estate (that is, the estate of a person who died without a will) is more expensive and time-consuming than the administration of an estate where there is a will.

LIVING TRUST

While similar to a will, a living trust has two significant advantages:

  1. Avoids the cost and delay of probate.
  2. Avoids the need for a guardianship since your assets are in a trust that names successor trustees if you should be unable to act.

The trust avoids probate because, in the trust document, you name a successor trustee to manage assets in case you become incapacitated or pass away.  The successor trustee is typically authorized to pay bills, pay taxes, manage and liquidate investments, and distribute assets to the beneficiaries named in the trust document, without court supervision.

In a living trust, title of your assets is transferred into the name of your trust.  You normally name yourself as trustee, so you retain complete authority and control over all of your assets.

A living trust is more expensive than a will, but typically costs far less than a probate.  It also avoids the 6 to 9 month delay caused by probate.  Moreover, it prevents disclosure of your assets in the probate court records.

TRUSTS FOR SPECIAL NEEDS

People with disabilities sometimes rely on government benefits to pay for basic needs, such as health insurance, housing, and long-term care.  The value of these benefits can be substantial.

Many public benefit programs are means-tested, meaning the beneficiary’s assets and income must be below certain levels.  Often, these programs require the person’s assets to be less than $2,000.

For many people, the receipt of an inheritance is an opportunity to improve their lives.  But for a disabled person receiving public benefits, the inheritance can actually worsen their life by terminating eligibility for benefits.

The disabled person now has to pay health insurance, housing, the cost of personal attendants, and other basic needs from the inherited funds.  Within a short time, the inheritance can be exhausted.

The disabled person can now reapply for public benefits assistance, but will not have any funds to pay for supplemental needs that could improve quality of life.

A special needs trust is a way to leave assets to a disabled person while preserving eligibility for public benefits.  Assets left to a disabled person in this manner do not have to be spent down to $2,000 to maintain public benefits eligibility.

The funds in the special needs trust can pay for “extras,” or “special needs,” that would improve the disabled person’s quality of life, such as travel expenses, cell phone, cable television, tickets to the symphony or sporting events, and many other things not provided by public benefit programs.  The disabled person retains the government benefits to pay for the basic necessities of life.

A special needs trust is created in a will or trust, usually by the parents of the disabled person as part of their estate plan.  The parents specify that any bequest for the disabled child be held in a special needs trust.  The parent selects a trustee, who has the responsibility to use the funds for the benefit of the disabled person.

A special needs trust can also be created with assets presently owned by the disabled person, or with proceeds from the settlement of a personal injury case.  However, there are additional restrictions when the disabled person uses his or her own money to set up the trust.

An inheritance left directly to a disabled person can actually worsen his or her quality of life by terminating public benefits.  An inheritance left to a special needs trust for the benefit of the disabled person allows public benefits eligibility to be maintained, and establishes a fund to improve his or her quality of life.

 

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