Determining how your assets will be distributed after your death is important. If you don’t take the time to plan for this, you cannot guarantee how your wealth will be disbursed. One of the most significant parts of estate planning is establishing a solid strategy for passing your money on to the people you love. This ensures that those who depend on you won’t be subjected to extreme financial distress in the event of your unexpected or untimely passing. It also ensures that the hard work you’ve invested into protecting the security of your family doesn’t go to waste.
There are essentially four ways in which a person’s wealth can be distributed after their death. The preferred way is with proper estate planning. Apart from purposefully and strategically determining where and how your money will be disbursed, all other methods entail a significant amount of risk. Understanding the benefits and drawbacks of each of these methods highlights the importance of creating an estate plan right now.
Joint ownership often seems like the simplest and most straightforward way of passing assets on to a specific party. When accounts are jointly owned or when properties list both you and the desired recipient on a deed, you can rest assured that full ownership will be given to the surviving party without the need for additional legal steps. However, joint ownership does not offer any real guarantee that the money passed in this fashion will be used as you see fit. For instance, if you jointly own a bank account or a home with your spouse, the money and assets that they receive through joint ownership can be used any way that they like. There’s no guarantee that these assets will go to or be used to the benefit of your children, especially if the surviving spouse also dies without having a formal estate plan in place. Money left to others via joint ownership can be taken in lawsuits, by creditors, or used by new spouses. It is far better to have a plan for wealth distribution in place that comes with sensible restrictions and protections.
Naming beneficiaries on insurance policies and accounts is a common way to designate how your wealth should be distributed after you pass. Far better than having no plan at all, naming beneficiaries still has drawbacks when it isn’t paired with other estate planning strategies. These include:
There are also problems associated with naming minors as beneficiaries. For minors, certain protections and safeguards must be put in place. If you do not do this yourself in advance of your passing, the court will have to step in and do it for you.
If you’ve gone out of your way to secure multiple forms of life insurance or have multiple accounts to pass on, you may have one or more that haven’t been updated in a while. When formal estate planning isn’t a priority, many people unwittingly maintain policies with ex-spouses and other parties that they no longer wish to benefit as their primary beneficiaries.
If you don’t take the time to name beneficiaries and if your assets aren’t held in joint accounts, what you own will, by law, pass through probate court. This is the least desirable way to have your assets distributed, as it gives you virtually no power to ensure that your money goes where you want it to go and on what terms. Probate is a government-established process that, in some areas, especially in places like California, can last two years or longer. During this time, the assets in question will be frozen, making them unavailable to surviving family members who may need them. Probate court is also extremely costly. Your loved one will have to pay attorney’s fees, court fees, and other charges that may total up to as much as five percent of your estate value or even more. Worse still, probate court is open to the public, and this means that the amount of your estate will be visible to anyone who wishes to see it, and your family may wind up publicly airing their grievances throughout the course of probate. Keep in mind that if your beneficiary is your spouse and your spouse passes away as well, without a secondary backup plan, the related assets will still wind up in probate.
Working with an estate planning attorney is the only foolproof way to guarantee that your wealth is distributed exactly as you wish after you’ve passed on. Attorneys understand the benefits and drawbacks of each wealth distribution strategy and can help put the right safeguards and protections in place for each asset, beneficiary, and circumstance.