It can be really confusing to figure out what is and isn’t a part of someone’s estate when they die. It seems to make sense that whatever they owned when they died is a part of their estate, but that’s not how it works.
Some assets get transferred outside of your estate. What that means is that when you die, they get passed on to a new owner without having to make a pit stop in your estate first. Usually, these are things that have a co-owner or a beneficiary or are ‘payable on death.’
It’s confusing, but I will try to explain using myself as an example.
My husband and I own our house together. We are “joint tenants with right of survivorship.” What this means is that we don’t own our house 50/50. We both own 100% of the house. We, together as one married unit, own that house. When one of us dies, the second after the person who passes takes our last breath, the survivor still owns that house 100%. The person who died no longer owns the house because they did not survive. It’s a ‘survivor takes all’ kind of game.
We also have a few different bank accounts. The vast majority of our money is in joint accounts. We both own those accounts, same as our house. We don’t own those accounts 50/50, we each own those accounts wholly. Nothing but morals (and a desire to stay married and to retire one day) is stopping me from withdrawing every cent from those accounts and blowing it on something ridiculous. Same goes for Mike. He could do that if he wanted. I’d be in jail for murder, but he could legally do it. When one of us dies, the survivor owns all of the money in those accounts 100% without having to go to probate court or worrying about what the other person’s will says.
We have a few smaller accounts that are in our own separate names. Mike has one we call his ‘toy’ account. I have no idea if he set up a beneficiary on that account or not. Let’s say he didn’t. If he dies first, then that money isn’t mine. I have to go to probate court to probate his will and then I get that money if and only if he left it to me in his will. However, if he has that account set up so that it is ‘payable on death (POD)’ or with me as a beneficiary, and he dies first, I don’t have to go to probate court to get his money. That money is not part of his estate. I can just go to the bank with a copy of his death certificate to prove he is really gone, and that money is mine, and it passes outside of his estate.
If you are the Executor of someone’s estate and you have to add up the assets of the estate and divide them up, this is important information. Let’s say your husband died without a will and you have two children. When you go to the probate court to administer his estate, you will have to divide it into thirds. One third goes to you, one third to your son, and one third to your daughter. But your husband’s 401k had you listed as a beneficiary, and the house was titled with you as a joint tenant with right of survivorship. You also had a joint bank account. This means that when you are adding up the total that needs to be divided, you do not include the value of the house or the amount in his 401k or the joint bank account.
A lot of times, this makes the heirs mad, especially when the husband or wife, the person who owned everything jointly, is step-mom or step-dad to the children. They have trouble understanding why the woman who was only married to dad for seven years gets the house and the 401k and the biggest bank account, and then the children who have known dad for 50 years only get a small share of what’s left.
That’s where estate planning comes in. If you want to leave your children a legacy, you can do it, but you have to plan for it. Make sure your beneficiaries are listed in a way that makes sense for how you want things to shake out. Make sure your house is titled the way you want it. Include people in your will – and make sure you have a will – that you want to benefit from your lifetime of savings.
Nothing in this article should be construed as legal advice. It is being offered for informational purposes only.