The first step in estate planning is to know who owns what so property passes in the manner the customer desires.
When assets are not titled correctly, property might not pass to the intended heirs. These neglected heirs can then be, let us say, peeved. Since others now own the property, legal action may be taken against those who allegedly mistitled the assets — including brokers. So it is critical to understand how your clients' assets are titled.
When two or more people own property, generally the options for title are joint tenancy or tenancy-in-common. Joint tenancy means when one of the joint tenants dies, the other owner(s) takes control of the entire property. The deceased owner can pass none of it to anyone but the joint tenant(s). If a tenant-in-common owner dies, his fractional share of the property passes as his will or living trust directs.
For example, John and Joan, a husband and wife, own stocks and bonds registered in joint tenancy. If Joan dies, John owns the stocks and bonds entirely. Even if Joan's will gives her share of the stocks and bonds to her son George, George gets nothing. The will cannot transfer ownership of this type of property. On the other hand, if the stocks and bonds were registered in John's and Joan's name as tenants-in-common, George would receive Joan's share of the assets.
Another titling problem is assets that pass by contract, such as retirement benefits and insurance. If Joan names John on her beneficiary designation form as the person to receive her retirement plan benefits, John will receive the benefits. This is true even if Joan (perhaps having forgotten about the designation made many years ago) says in her will or her living trust that the benefits should pass to George.
Insurance contracts operate the same way. If John is the named beneficiary, John will receive the insurance proceeds at Joan's death. Even if her will gives the insurance to George, he does not receive a dime — too bad.
Property held in wills or living trusts passes to the people named in those respective documents. Wills only pass property that is in a customer's name alone, including partial interests. Living trusts only pass property titled in the name of the trustee or given to the trustee at death by beneficiary designation or by will.
For example, if Joan's living trust says her personal property and residence go to George, but the property is in her name and Joan's will leaves all her property to John, it goes to John.
If Joan dies without a will, property passes according to state law. This split might be one-third to John and two-thirds to George. But states differ as to who gets what and how much.
Dying with a will is called dying “testate,” and dying without a will is called dying “intestate.” The property will go to someone. It is up to you, your customers and their legal advisers to have your clients' property correctly titled to ensure that what clients want, in fact, happens. No amount of evidence about whom your customer really wanted to have the property means anything without proper title (with the exception of fraud due to forged signatures).
Always ask clients about titling assets. The first step in estate planning is to know who owns what so property passes in the manner the customer desires.
Roy M. Adams is worldwide head of the Trusts and Estates Practice Group at the law firm of Kirkland & Ellis in New York. In addition to his law practice, he lectures extensively on estate planning and has authored several professional texts including “Contemporary Estate Planning: A Definitive Guide to Planning and Practice.”