Most people are familiar with joint versus individual ownership of property, but did you know that there’s a third way to own property? It’s through contract rights, and this type of ownership can have a large impact on your estate plan.
In general, property in which someone holds contract rights is not subject to probate. Examples of this type of property include payable on death accounts, life insurance policies, retirement accounts, and revocable living trusts.
Payable on death accounts are bank accounts that you own and control as an individual during your lifetime, but for which you’ve designated a beneficiary. At your death, the money in the account belongs to the person you’ve designated; no probate is necessary – -all your beneficiary has to do is present your death certificate to the bank. Payable on death accounts are often also called Totten trust accounts, “In Trust For” or ITF accounts, or transfer on death accounts.
Life insurance policies for which you’ve designated a beneficiary are also payable to your beneficiary, outside of the probate process. Your beneficiary will just have to present your death certificate, along with the original policy, to the insurance company. One exception to this is when your beneficiary is a minor and the policy proceeds are payable directly to him or her. Because minors are not legally permitted to manage their own property, then the court will get involved and appoint a conservator to manage the property on behalf of the minor until he or she reaches adulthood.
Retirement accounts are a third type of property involving contract rights, and they work in much the same way as life insurance policies or pay on death accounts.
Finally, there’s the Revocable Living Trust, which is a contract between you, your trustee, and your beneficiaries. You put property into the trust, to be managed by the trustee on your behalf while you’re alive, and then to be distributed according to your instructions upon your death. Your beneficiaries own the property through contract rights, so when you die, the property passes to them outside of the probate process.
It’s important to maintain your beneficiary designations for all of these types of property. If your beneficiaries die before you do, then there are no contract rights, and the property becomes part of your estate and has to be probated.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.