When one sets his or her mind to finally thinking about an estate plan, it usually becomes clear pretty quickly that there are a lot of considerations that need to be contemplated. Unless you have an absolutely firm grasp on the laws of New York, it’s always best, at least in my opinion, to seek the counsel of an experienced professional who can help you navigate the course and come up with a plan that makes sense.
One of the biggest misconceptions that I regularly encounter is the belief that everything one owns will pass through his or her Last Will and Testament. For better or worse, that’s (typically) not the case. In New York, and most other jurisdictions if truth be told, there are two distinct categories of assets that individuals likely own – testamentary assets and non-testamentary assets. The category under which each asset falls will determine how it passes at the time of death.
As far as an explanation is concerned relative to how the categories differ, allow me to clarify. Testamentary assets are best described as those assets which you alone own exclusively and for which there is no provision inherently attached as to how you want them to pass. Typical assets that might be listed in this category include vehicles, stocks, bank accounts and real estate. Given that these assets do not contain any terms setting forth how they are to be distributed at the time of death, they are included in a will in order to direct how and to whom the assets go.
By contrast, non-testamentary assets, or what are sometimes known as self-directed assets or non-probate assets, are not controlled by a Will. They instead pass outside of one’s estate and are typically contractual in nature (although not always). Typical assets that fall under the non-testamentary category include life insurance, IRAs, 401Ks and some other retirement plans. These assets will pass outside of your Will, thereby not adding to the overall size of your estate. They pass according to the beneficiary designations you set in place prior to passing away (so always make sure those designations are current, as you don’t want an unintended person to take!!).
While non-testamentary assets typically pass outside of a Will, there are instances where one may wish to control their distribution through a Will. For example, depending on the age(s) of certain beneficiaries, it may not make sense to name those individuals as the outright recipients of a potentially significant asset (like a 401K or life insurance policy). When those occasions arise, it’s possible to direct the distribution of a non-testamentary asset through a testamentary trust that you establish in your Will. This will allow you to ensure that the asset comes to the intended recipient in a more reasonable manner. If we’re calling a spade a spade, I don’t think it’s farfetched to say that most individuals would not want to drop a half-million dollar insurance policy directly into the hands of an immature 18 year-old without some mechanism of control in place; that’s what a testamentary trust protects against in this instance. The bottom line is that you have options to ensure that even non-testamentary assets are distributed responsibly. These choices, however, should be considered under the guidance of a qualified professional who can assist in developing a plan that makes sense.
As alluded to earlier, there are some assets that are generally considered testamentary in nature that can nonetheless pass in non-testamentary manner. The first asset is a bank account; the catch, however, is that the account must be held jointly with rights of survivorship. When one account holder passes, all of the assets in the account automatically pass to the other party named on the account. Similarly, bank accounts marked as ITF (or in trust for) will automatically pass to any beneficiary that has been identified on the account. The assets in an ITF account fully remain the property of the owner/depositor until such time that he passes away, at which point the assets will pass outside of the Will and probate process.
The last noteworthy asset that bears mention is real estate. Certain real estate, and in particular that owned by married couples “as tenants by the entirety", will automatically pass outside of the estate as a non-testamentary asset. When real estate has been acquired by a married couple as “tenants by the entirety", the property passes from one to the other at the time of death as if the former had never even existed. Between spouses, this is a wonderful way of passing property as it reduces the size of one’s estate by what is often the largest asset a couple owns. The benefit of real estate passing in this manner, however, extends only to the married couple itself; children or subsequent heirs won’t enjoy the benefit.
The lesson to be learned from this post is always seek qualified counsel when considering your options for an estate plan. While non-testamentary assets can be a wonderful planning tool, they can likewise frustrate your intended plan if not used properly. Avoid that possibility as much as possible by understanding how to maximize their benefit.