Who gets what?

One of the most interesting aspects of working with clients over my years here in Lodi has been helping them plan and prepare for who will end up with what they have tucked away and grown over their lifetimes.

Many investors come to see us as couples, and as the years have gone by one of the two has passed. Sometimes, the survivor has many more years, sometimes not so much.

How do investments and other holdings pass to who is next? There are three primary ways. By title, by contract, and by will or trust.

Many couples hold accounts, houses, cars, and the stuff of life in joint ownership. When couples hold property this way, it automatically transfers to the survivor, 100%. The transfer is done by presenting a death certificate to the institution that holds the account and completing forms for a new single account by the survivor.

In California, community property allows for the survivor to have a new start on all capital appreciation assets. Homes, other real estate, businesses, farms, stocks, and mutual funds all tend to mostly grow over time. Some of the profit or gain comes to us as we go along in the form of rentals, or crop proceeds, or dividends, and with mutual funds realized capital gains.

But often, a part of the gain has not yet been realized and is carried by our assets to be taxed later, if we sell. Like Warren Buffett, if you don’t sell, but hold on, you don’t pay taxes.

One of the tax rules is that assets that pass from an owner to heirs, get a brand-new start on basis with a “step-up” to current market value as of the decedent’s date of death. Here in California couples hold assets in community property. Because community property is an ownership where both spouses own it all, when one passes, the other gets a full restart.

The second way assets pass to survivors is by contract. These are the things in our lives that come with beneficiary forms. Life insurance, retirement accounts, and annuities are some of the most common. Many banks and brokerage firms also offer payable on death or transfer on death arrangements. These designations are often done when we arrange our accounts but can become stale over time and bear review.

Oh, by the way, retirement accounts and annuities are not stepped up on inheritance. When you decide to withdraw what you inherit, you must pay taxes. A big change in the recent tax laws now provides that the non-spouse beneficiary of retirement accounts has a limited time to cash out and pay tax — 10 years instead of projected lifetime.

The final way assets go to heirs is via our will or trust. Of course, some people never get around to doing either and then the laws of intestate succession (Latin for this dude died with no document) apply. Lawyers are the best at explaining the law and estate matters are best discussed with a bright legal mind. Lodi is blessed to have several good ones, just ask a friend.

The state says, first it all goes to your spouse. Next, if no spouse survives, equally to the kids. If no kids, to grandkids. If no spouse, no kids, no grandkids; up to your parents. No parents, your brothers and sisters get equal shares. And with no will, your heirs need to go to probate or use a small estate affidavit to take over your stuff.

It used to be expensive to die. I mean for federal estate tax, state inheritance tax, and the costs of probate. Now, because our laws have evolved, not so much.

The federal estate tax exclusion is now a whopping $11.58 million plus any unused exclusion of your spouse, if you are the last to go. Most of us will never have to worry about being over these new limits.

We no longer have a state inheritance tax, we voted it out sometime ago and all the assets we hold in the first two forms — jointly or with a named beneficiary avoid probate. For most couples, just about everything fits into those first two categories.

The complexity comes in when there is just one owner. If it’s just you alone, you may be able to put your loved ones on your accounts as beneficiaries for most of your holdings but it’s tough to do with your home or other real estate.

Most attorneys advise clients to not add a child as a co-owner on real property due to the chance of liability issues becoming a potential problem in the event of an unfortunate event — say divorce or accident. And often, while you love them, you just don’t want them too involved in your personal business.

Wills set out who gets what, when and how and are best done when you are healthy, sitting with your attorney, and discussing all the family issues. Maybe one of the people you love is no good with money or maybe just no good. Maybe you want your kids raised by your very dear sister but only if she is still married to that handsome bro-in-law you really like. Maybe you want the custodian of your kids to be that great couple from your church, even, or maybe because, they aren’t one of your crazy relatives.

Maybe you don’t want it all to transfer at once, you know string those payments out, so it lasts a bit longer. Maybe there is someone in the family that has a disability and you need to hear about how an inheritance will affect their benefits.

One of our processes as financial advisors is to help our clients create a current net worth statement. It’s a great document to have when you go to your attorney and start this “who gets it?” talk to make the discussions more complete.

Trusts are becoming more popular these days. You might have noticed this in the weekly real estate transaction reports. More and more you see the seller or buyer has title in the George and Martha Trust.

Trusts are like wills in that your attorney is setting out all the provisions your heart desires, but a trust is a private legal arrangement for the transfer. Because it is private, there is no probate of trusts. That allows transfers to occur more quickly, without a public filing, and with none of the court involvement or probate fees.

Well, this has been fun thinking about how things all work when you croak, hasn’t it? There is more to consider and some traps that might be good to avoid. Stay tuned and have a great rest of your week!

Phil Lenser is a retired Lodi financial advisor with over 40 years experience now sharing investing ideas and insights.

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