Estate Planning Primer1:
How Property Passes At Death
by Kathy N. Rosenthal, Esq. (c) 2013
This is the first in a series of articles which Rosenthal & Markowitz makes available because you will be a better advocate for yourself when you are well-informed. The focus of this introductory article is how property passes at death and some of the ramifications of passing property by operation of law.
Estate planning requires taking control, making informed decisions and then implementing those decisions. Everyone can do it and should do it – whether your estate is modest or complex.
First, you need to gather information and create a list of your assets and assess the needs and capabilities of family members to manage assets. Second, you need to contemplate your planning goals (such as minimizing taxes and/or maximizing control to protect some of your beneficiaries from themselves and their creditors). Third, you need to know information about inheritance laws and tax laws (and insurance laws, matrimonial laws, Medicaid laws and property laws too). Estate and gift tax planning should be done with a competent attorney, experienced in estate planning (and, if appropriate, the related fields previously mentioned).
Estate planning can be very complicated and may require juggling competing interests. It is certainly very fact-specific. The tax and property laws change regularly, so the information given here is general and meant to be introductory in nature only. Even though this Primer is detailed and full of information, it barely scratches the surface of information needed to manage and coordinate the laws of gifting during lifetime and at death, charitable gifting, insurance laws, retirement planning, banking, domestic relations laws, and last, but never least, taxes (property, income, gift and estate taxes) all of which must be considered simultaneously.
How property passes at death:
At death, property passes one of three ways: (1) by the laws of intestate succession, (2) by Will, or (3) by operation of law.
Property which decedent (the deceased person) owns solely in her own name passes either (i) by Will (if decedent had a valid Will) or (ii) by the laws of intestate succession also called the laws of intestacy (if decedent does not have a valid Will). Property which passes by Will is subject to a probate proceeding2. Property which passes by intestacy is subject to an administration proceeding3.
Property which decedent owns jointly, or which names a beneficiary, or which is owned by a lifetime trust4 passes directly to the named beneficiary (of the account or the trust) or passes directly to the joint owner. These assets pass by operation of law. These assets are sometimes called “ non-testamentary ” or “ Will substitutes ” because they pass property at death and substitute for a Will. Property passing by operation of law does not pass under decedent’s Will; only in the rarest of circumstances is it even effected by decedent’s Will. However, even these assets which pass by operation of law may be included in decedent’s taxable estate.
The ramifications of owning assets which pass by operation of law:
Some people believe that owning property jointly or naming a beneficiary will solve all probate, Medicaid and creditor problems. Unfortunately, that is not necessarily legally correct, and owning property jointly can have disastrous effects during the owner’s lifetime. In fact, all Will substitutes have ownership and tax ramifications for the creator both during lifetime and at her death, not all of which may be appropriate for each person.
It is necessary to understand the nature of joint ownership and the legal ramifications. Here are just a few of the issues and complications which may arise:
– If you “put” someone else’s name “on” a bank or stock account as an owner, then you are presumed to have made a gift of one half to the other person.
– You may not be able to close the account or take back your money whenever you want to. The other person may need to consent to withdrawals and to closing the account.
– Half of your money may be subject to the creditors of the other person.
– Under certain circumstances, you may be liable for a gift tax on the half you inadvertently gave to the other person, and the gift may incur a look back period or penalty period for Medicaid planning purposes.
– When you die, your creditors may still be able to reach half, if not all, of the amount in the account.
– When you die, the full amount in the account may be taxed in your estate (although it may be subject to the marital deduction if the other person is your spouse).
– When you die, if the other person died first, the account won’t pass by operation of law. If you haven ’ t written a Will because you were sure you ’ d outlive that other person, then, when you die, your estate may need an administration proceeding and your property will pass under the laws of the State of New York, not necessarily to the person you ’ d choose.
Note that there are also ramifications to naming someone as a beneficiary of your stock or bank or brokerage account.
Therefore, before you put someone’s name on your account or add someone’s name to your deed or even name someone as a beneficiary of a stock, bank or brokerage account, you need to know and weight all of all of the tax, creditor and personal consequences.
As part of your estate planning, it is necessary to review all of your assets and how each one is owned and whether it passes by operation of law when you die. This review is necessary so that you can 1) understand what your legal rights are with respect to the property you own while you are alive, and 2) confirm that all of your assets will pass the way you want them to – to the person you want to inherit your assets and with whatever controls are necessary depending upon the special needs of the beneficiary, and 3) prepare for the estate and income tax impact and implications to your estate and your beneficiaries.
We hope this information has been helpful. If any of our attorneys can be of additional assistance, please do not hesitate to call, 914.347.1292. Home consultations may be available upon request.
1. The information provided in this article is not intended to be specific legal advice or to be followed without individualized, professional guidance and assistance. All information given pertains only to New York State law, unless the article specifically states otherwise. The information given is only current as of the date it is written. Despite our best efforts to update articles as the laws change, it is possible that some of the information might not be current. Therefore, please note the date on all articles, and watch for others which are more current.
2. A probate proceeding is a proceeding which is brought in the Surrogate’s Court in the County in which decedent lived at the time of her death. The purpose of the proceeding is for the Court to approve the Will (to get the Will admitted to probate) and for the Court to appoint an Executor whose job is to settle up the estate and make distribution according to the terms of the Will.
3. An administration proceeding is also a proceeding brought in the Surrogate’s Court. The purpose of the proceeding is to establish that decedent did not have a valid Will and for the Court to appoint an Administrator whose job is to settle up the estate and make distribution according to the laws of intestacy.
4. A lifetime trust is a trust created by a person, called a creator or a grantor or a settlor. It is created by a contract called a Trust Agreement. The trust can be funded while the creator is alive and/or after her death.
revised: January 2013