I want to continue our conversation on estate planning. Specifically, I want to talk about the order of transfers. Essentially, how things get transferred to other people, the different mechanisms and essentially what order they take place.
As a reminder, estate planning is one of the two rails when making progress up the path of financial success.
Those rails are there to help you keep you in bounds to keep you on the path because outside of those rails. Bad things occur. I liken them to guardrails on a road with cliffs on the other side. As long as you stay inbound, as long as you stay on the road or on the path, good things are going to occur.
But if you go over the rails, or there is no rail in this case for most people, there is no estate planning, bad things potentially could occur that will disrupt and undo all the progress that you’ve made in that’s what we’re trying to avoid in doing some proper estate planning.
But first a disclaimer. I’m not an attorney. I cannot practice law. Nothing I say to you will constitute legal advice. I strongly recommend you consult with your attorney. or lawyer when making any decisions. My goal here today is simply. to educate you and hopefully motivate you to take some action on your estate plan.
Let’s first talk about the order in which property or assets transition or transfer at death. If you remember back to grade school or maybe middle, middle school there was a thing called in mathematics called the order of operations. It was basically PEMDAS, please excuse my dear Aunt Sally.
Parentheses, Exponents, Multiplication, Division, Addition, Subtraction. And that gave you the order in which you had to solve math problems. And if you did the amount of order, like if you did the addition before the multiplication, you got the wrong answer. Why was it the wrong answer? I don’t know. There’s just an order of things there’s supposed to be, and it was decided.
By some old people long, long time ago. And, you know, we’re just kind of taught if we do it wrong, it’s wrong. You must do math problems in the right order. Well, just like there’s a mathematical order of operations, there’s an order of transfers when it comes to. What occurs at death. The four basic ways things are transferred is number one by contract, number two by title, number three by trust law, and number four by operation of state laws.
Let’s unpack those. And it’s, it’s important because when we talk about the will, the will is the last thing that of how things are transferred.
By Contract
Number one is by contract. If you think of the class example is like life insurance. If you have a life insurance policy, that’s a contract between you, generally the owner of the contract and an insurance company that says, if I pay premiums of this amount upon death of the insured, which is generally you that.
company will pay X amount of dollars to this beneficiary. That is a contract that you have. And so, the beneficiary listed on there, the insurance company must pay that amount of money to that person. Even if your will says something completely different, that all my money should go to this animal shelter, there’s a contract and that contract takes precedent over your will.
Life insurance Policies are transferred that way. Same with investment accounts, things like IRAs or 401ks, those have beneficiaries associated with them. At your bank, you might have what’s called a TOD or POD, a transfer on death or paid by death on file, essentially. It’s kind of like a beneficiary of if something happens to me.
Pay this account to that person. Those are all contracts that are established with institutions and those institutions must abide by what the contract says, and that will Trump everything else. That’s number one. Number two is things transfer by title. If you think of property that has titles, think of like buildings or real estate or automobiles or even some, Joint accounts, things like that.
If you have two owners more or more than you have, you have a joint ownership on those accounts then. And if you have a right of survivorship associated with that title, depending how your titles are set up, what will happen is that property will automatically transfer to. The surviving person, for example, with Eric and I, we have everything that we own is joint titled.
Our, our properties that we own are joint titled or automobiles that we own are joint titled. And. Every account that we can have joint tiles, our bank accounts, checking accounts things like that. Some brokerage accounts, we are all joint titles. Something happened to me by default, it’ll automatically go to her again.
It doesn’t matter what the will says. The will says I could leave everything to. My oldest child or my youngest child or soon to be grandchild, but title will trump everything that that will says again, because there’s an order in which things are transferred. Number one is by contract.
By Title
Number two is by title. If you have a joint account and if you have a right of survivorship on that title associated, those accounts, the. Property will automatically transfer to the survivor.
By Trust
Third way in which assets will transfer is that by trust and that is governed by trust law. If you have a trust that’s set up the most common two types of trust that most people would set up is number one, a revocable living trust. That’s a, it’s a trust is essentially, and we’ll do a whole show on trust in the future, but it’s basically an entity.
Can I think of it like a business where assets are transferred from. You as a person to this entity, it’s kind of like a business, so if you own a business, a business can own the property. The business owns a car or a piece of property and not the owner of the business. Same thing with a revocable.
living trust. It’s an entity where a person then can put assets inside of it and they no longer own them personally. The assets are owned by a trust. The other type of trust that’s common is a testamentary trust. That is one that’s basically made at death when a person dies and assets are go into that.
For example, when our kids were young, we had a trust set up for them, if something happened to us, all our assets would go into a trust. It had a trustee. There were rules associated with that trust, et cetera, et cetera. Well, trust law dictates what happens with trust, who can get money, who cannot get money when they can get money.
Things like that., property that is placed in trust must be distributed based upon the trust documents and trust law, again, not what the will says. Right, so hopefully you can see through these things that if the will says one thing, but all these other things say something else those, those could be contradictory.
And those will trump. Over what your will say that’s why it’s important, especially when I’m working with clients. I tell them let’s make sure we have beneficiaries on all the accounts Let’s make sure that everything can be joint titled that can be Because it becomes a lot easier to deal with stuff should something happen to you the last way property is transferred is that of operation of state law?
By Operation of Law
When it comes to test state laws or intestate laws, they are dictated by state law so not the federal level but at the state level and each state will be a little bit different. If a person dies with a will, they are said to have died. Testate, they have a testament. They have a last will and testament of a person who dies without a will.
That person is called in intestate. And so, depending on kind of the state laws, there’s in intestate laws that’ll say if you die without a will, here’s what’s going to happen. And then if you die test state and you have a will. The state will also say here’s what’s going to happen.
That’s where things like probate comes in. Probate is essentially a court process. It’s a legal process that transfers property and assets from a dead person. To a living person. For example, let’s say I owned a car, and I owned it outright and I died. Well, normally when you sell a car to somebody, the seller must sign the title and then the buyer signs the title, and you take it to the DMV, and they switch it over.
Well, if I’m dead, I can’t sign the title as the seller because I’m dead. And. If only I owned the car, nobody else could sign on my behalf. Erica couldn’t sign on my behalf, my executor couldn’t sign on my behalf, you couldn’t sign on my behalf. Nobody can do that. The only person who can sign a title for a dead person is basically a probate judge.
And that’s what probate is. That’s what that process is. It’s retitling things from the dead to the living. Alright, so that is how Things are transferred by contract, by title, by trust law, and then by operation of state law.
Micro Action
Your micro action for the week. Is to review your property titling and accounts that you have. I’d recommend you go through them to see who the beneficiaries listed on the accounts are and ensure that that’s the person that you effectively want to receive the money that’s in that account.
Additionally, go through you, all your property, your, your deeds, your titles, your cars, your bank counts, things like that, and see. If you’re married or if you’re single, how they are titled, are they titled just in one person’s name? Are they titled in two person’s name or more? Do they have rights or survivorship associated with it?
Because again, those things will Trump what’s written in your will.
In the next episode, we’ll continue to unpack the various documents that are associated with a good estate planning, the agents inside of them and some characteristics that are involved in choosing them. I hope this helps you in your financial journey. If you have any questions or comments, you can leave them below, or you can send an email to Mike@truewealth.show.
And until next time, I hope you have a great day.
