Last week, I started breaking down Batman's estate.
Well, not really.
But I am using the Wayne family as an illustrator to demonstrate what could happen if your assets are not titled correctly.
For the purposes of our illustration, we have Thomas and Martha Wayne. Thomas spent his entire adult life building his business in Gotham to a value of $8 million.
Then the Waynes were tragically struck down during a mugging gone bad. Thomas was killed instantly, and his wife Martha died four months later from her injuries. Their son, Bruce -- who, for the sake of illustration, we'll say was actually 21 at the time of their death -- was left to handle their estate.
All before he figured out the bat thing...
But here we go -- let's not get distracted by my poor attempt at bringing levity to a topic which can actually be extremely painful and frustrating for those that are affected by it.
Tony Khait, CPA, PFS's
"Real World" Personal Strategy Note
Khait, CPA, PFS's Asset and Beneficiary Titling Guide (Part 2 of 2)
Last week, we considered assets titled with:
1) Sole ownership
2) Joint tenancy with rights of survivorship (JTWROS)
If you missed that installment, let me know and I'll send it your way.
But here are the other three common titling mechanisms...
3) Tenancy by the entirety (TBE)
Only persons married to each other can hold property jointly as tenants by the entirety. With TBE, each spouse holds the entire baton. They can't sell their share and pass the grip to someone else because they don't hold a piece of the baton separate from the other tenants' pieces. And they cannot break off a piece of the baton and keep it for themselves.
TBE can provide asset protection features unavailable in other forms of joint ownership. Suppose Thomas's death was somehow due to his negligence (unlikely, but consider). If he and Martha held the baton as TBE, Martha can inherit the entire baton at Thomas's death, free of Thomas's liabilities.
In our litigious culture, wealthy individuals often have a bull's-eye painted on their backs. Everyone should make asset protection a priority. You should probably have an excess liability insurance policy, often referred to as an umbrella. If you are married, your real estate should be held in TBE. Some states' laws also allow married couples to title their investment assets (called personal property) as TBE. Generally speaking, creditors cannot seize assets held in TBE because doing so infringes on the other tenants' rights to the entire baton. TBE isn't perfect, but it does give some liability protection to married couples.
TBE, like JTWROS, trumps a will. It has to be integrated carefully with your estate planning documents to ensure that it will not thwart your plan to reduce your estate tax exposure.
4) Revocable living trust
With a revocable living trust, the trust owns the baton. Think of it as a glove. The trustee controls the glove, and usually you name yourself trustee during your lifetime. Your hand is in the glove and holds the baton. Because the trust is revocable, you can do anything you want while your hand is in the glove. You can pass the baton from your gloved hand to your ungloved hand, passing the baton between the trust and sole ownership.
So long as the glove is holding the baton when you die, the baton does not fall into probate. The trust still holds the asset in the same way the glove still holds the baton. On your death the trust becomes irrevocable. The trust documents specify the next trustee and the distribution of the assets. The next trustee slips his or her hand into the glove and immediately controls the assets.
Revocable living trusts are common estate planning instruments. They avoid probate and thus help families hold on to the baton. By themselves they don't limit estate taxes or creditor claims, but they can be effective estate planning tools. However in many states, the assets in your revocable living trust at your death are still subject to the claims of your creditors.
5) Bypass Trust
A bypass trust elects someone who will hold the baton in a trust after you die, for the benefit of your surviving spouse. A bypass trust may provide Martha Wayne with income from the business while she is alive, but it passes ownership in the business to her son after she dies.
Because of legislation passed in 2011, these are much less commonly used and their advantages are often redundant to other kinds of succession arrangements.
Depending on the asset, the process for changing the title of your assets varies. To change the title on your house you must record a new deed. Changing the title on your car requires a trip to the Department of Motor Vehicles. If you want to change the title on your investments, you must send your custodian a letter. Drawing up legal trust documents to facilitate asset titling and transfer requires professional legal advice, which could be seen as potentially expensive. But the alternative is often much more costly.
When people die without proper estate planning, the state distributes their assets in their own time. If someone involved is incapacitated, you may not be able to act on their behalf. Just because you are expected to take care of their affairs doesn't mean you will have the legal right.
So -- use this article for your own situation, and send it also to your parents as a way to begin the discussion of these things with them. They will realize you want to know exactly what to do in an emergency. You'll be glad you did.
For your own estate, just reply to us here with any questions this article or series has brought up for you regarding your own titling and beneficiaries, and whether your current setup is ideal for your situation, your overall wishes, and today's tax legislation.
I should hasten to add that I am not an estate-planning attorney (just a tax expert!), and this is not to be construed as legal advice for your specific situation. Let me know if you have any questions -- and if it is something that we cannot handle on your behalf, we will connect you with an approved (and empathetic) professional who can speak into it.
Tony Khait, CPA, PFS