Investing for the Rest of Us – How to Own

Wang Yan

Global Courant

Death, taxes and teen texting – these are the certainties of life. The tax code is far too complicated for anyone to understand, and why teens can text all day but never write a thank you note is an unsolved mystery.

Death, on the other hand, is somewhat simpler. One day you read the newspaper and the next day you are in it. Let’s see what happens to your property when everyone knows where to send the flowers.

First, and surprisingly to some people, most of your property probably won’t end up in probate court. Only what passes by goes through the process. Don’t worry if you don’t have a will, the state has one for you. Of course the state has never met you and doesn’t know how you want things divided, but whose fault is that? Dying without a will is called colon cancer. You don’t want to die. Go to an estate planning attorney and get healed.

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Now that we’ve sorted that out, ownership goes over like this.

Life insurance and annuities

The death benefits are paid to the named beneficiaries. Unless you name your estate as a beneficiary, the death benefits will escape probate. In general, it is not a good idea to name your estate as a beneficiary. One reason is that assets in your estate are available to creditors. The benefits are also slower to reach your heirs’ hands. No heir has yet been born who wants your money later than sooner.

If you’re dealing with estate taxes, you may want to consider an irrevocable life insurance trust (ILIT). An ILIT excludes the proceeds of death from your taxable estate.

Life insurance companies used to mail a check directly to the beneficiary. These days, they are more likely to send a checkbook that the payee can access. Life insurance companies claim that this is more convenient for the beneficiary. Call me crazy, but I think they’re doing it to hold onto the cash a little longer. Most beneficiaries already have a checking account. Why would they want another?

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Plan retirement

Deferred retirement plans, including individual retirement accounts, go through the beneficiary. The same rules apply to the surviving spouse who exists for annuities. Of course, it helps to have a surviving partner. The people who wrote this tax code were probably married.

A Roth IRA also passes by the beneficiary, but has no income tax consequences for the beneficiary, even if the beneficiary is not the surviving spouse. The people who wrote this part of the tax code were probably divorced, but they had a bunch of kids.

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If taxes are due when they are received by a beneficiary, the taxes can be spread over several years through various techniques, including a “rollover beneficiary IRA.” Go to a financial planner to see what works for you.

Property in common ownership

Many real estate properties, such as real estate, bank accounts, and brokerage accounts, are jointly owned. The most common form of co-ownership is “joint tenants with right of survival (JTWROS).” The surviving owner automatically gets the asset upon the death of another owner.

JTWROS should not be confused with another type of co-ownership called “common lease”. Rent common divides the property into actual shares, and when an owner passes away, they can leave the property by will to whomever they choose. Take a beachfront cottage jointly owned by two married brothers. When someone dies, he can leave his inheritance to his wife and children. They can then continue to enjoy their holiday by the sea. Of course, as this goes down the generations, a real family rat nest is created, but if you can’t fight family over who gets the best summer weeks, who can you fight?

Real estate in your own name

Now we come to the property that passes by will. If you only own something that doesn’t pass in the ways described above, it becomes part of your estate. For example, if you have a savings account that is only in your name, it will be added to your will. Your will appoints an executor, a thankless but necessary task. It is up to the executor to inventory your estate and ultimately distribute it to your heirs.

Many people set up and fund “living trusts.” These trusts are established during your lifetime and funded with assets that would otherwise be transferred by will. Since most people are their own managers, control over the assets is not a problem. Upon the person’s death, the assets will come under the administration of a new trustee. Since the assets are already in trust, they escape the probate process. The assets are still subject to estate taxes because you managed them during your lifetime.

That’s the basics. Consult a financial planner and an estate planning attorney to work through the details. This is an area that is not fertile ground to do it yourself, and death does not allow mulligans.

The opinions expressed in this material are for general information only and are not intended as specific advice or recommendations for any individual. Consult your financial adviser before investing to determine which investment(s) are right for you. All stated performance is historical and is not a guarantee of future results. All indices are unmanaged and cannot be directly invested in.

Investing for the Rest of Us – How to Own

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