The laws in every state are different and the following information may not apply, or may be applied differently, in some states. This article is intended to provide general information only; please consult your local attorney for information pertaining to your local jurisdiction.
Operation of Law – Everyone living in the U.S. and Canada has certain inalienable rights provided to them by the law, and one of those rights is the transfer of property. We do not need to take any action to obtain these rights — they are just given to us and these rights cannot be taken away from us or given away. An excellent example of the operation of law is intestate succession.
A person is considered to have died intestate when they haven’t created any legal documents (usually a will or a trust) specifying who they want to receive their worldly possessions or naming their choice of a guardian for any minor children. Intestate succession leaves all estate decisions to be made by the operation of law in the state where their assets are located. In other words, state law directs all the decisions if the person chooses to not document their choices while competent and living.
Another common example of transferring assets by operation of law is found in the transfer of real estate. When real estate is held as joint tenants with rights of survivorship, or tenants in common, the surviving owners of the property do not necessarily need to go through probate to receive the deceased owner’s share of the property. However, when property is held as tenants in common the deceased owner’s share may be given to a beneficiary through a will, which will then have to go through probate.
Finally, some states have community property laws that stipulate that any property acquired during marriage is equally owned by both parties. When one spouse dies the laws of the state dictate how a portion of the property must be distributed.
There are other processes that are considered Operation of Law. Some examples of these are: adverse possession, pretermitted spouse or heir, or termination of life estate. There are certainly other processes not mentioned, but they are outside of the scope of this article.
Limits to Operation of Law
One’s choice of an agent such as a power of attorney (attorney-in-fact) for personal household business, health care or guardianship for minor children will only be known by preparing a legal document while one is competent and living. In addition, one’s wishes for life sustaining medical measures will only be known if an Advanced Health Care Directive has been prepared. Perhaps most important to the donors we work with, operation of law does not allow for any charitable contributions after death, so if an individual has any charitable intent they will need to find other means to transfer their property while they are alive. Operation of law is a good fail-safe way to make sure property is transferred, but it will not make an individual’s thoughts known for these very important and deeply personal matters.
Transfer by Contract – Property may avoid the probate process through a contract that establishes the ownership rights of the property. The contract describes the property, lists the rights to the property during the owner’s lifetime, and designates who is to receive the property upon the death of the owner. The other party to the contract is then under obligation to comply with the terms of contract and carry out the wishes of the contract owner when they die, thereby distributing the property to the proper beneficiary. Because the property is governed by the terms of the contract it does not have to go through the probate process.
A well-known example of transferring property by contract is through life insurance death benefits which are distributed by assigning one or more beneficiaries to the policy. Contingent beneficiaries may also be assigned. While the owner is competent and living these beneficiaries may be changed and can be done so quite easily.
Retirement accounts also have named beneficiaries, and contingent beneficiaries may be assigned as well.
Some states even allow an owner of a vehicle to designate a beneficiary on the title. With a transfer on death beneficiary named on a car title there will be no letters testamentary/of administration required to transfer the title after the death of the owner to the new owner. The owner may change beneficiaries at any time, however contingent beneficiaries may NOT be assigned for vehicles.
Banks and credit unions allow account owners to create during their lifetime a payable on death designation for various types of accounts. The account owner simply designates a person to receive the funds in the account upon providing proof of the owner’s death.
Banks allow accounts to be set up to benefit another individual with the person setting up the account serving as trustee while they are alive. Upon the death of the trustee the proceeds in the account become the property of the beneficiary. The beneficiary has no rights to the asset until after the death of the trustee.
Investment accounts are the most likely accounts to use the term Transfer on Death (TOD), though any account may use a TOD that names beneficiaries during the life of the owner of the account. Proof of death of the owner allows the beneficiary to receive the proceeds without probate.
More than 50 percent of states in the USA allow individuals to transfer ownership of real estate at their death to a predesignated beneficiary. The general name for this is a “Transfer on Death Deed.” It may be called other names in your state, but the function is the same. A transfer on death beneficiary may be changed while the owner is competent and living and probate is avoided for real estate titled in this fashion. The beneficiary has no rights to the real property prior to the death of the owner so the beneficiary still receives a step-up in basis because they did not receive the property until after the death of the owner.
Benefits to Transfer by Contract
It is easy to list a beneficiary using the techniques discussed above. Usually this requires filling out a simple form without requiring any expert legal advice and can be done with little or no cost. Often one can name multiple or contingent beneficiaries as well. It is also possible to name charitable beneficiaries which makes this option quite appealing to many of our donors.
Things to Consider
There are certain things to keep in mind as well as to avoid if you wish to pass assets to beneficiaries by right of contract.
When using only the transfer by contract method it is not possible to name a guardian for any minor children or designate a power of attorney for financial or medical needs. It is necessary to have a will and other appropriate legal documents to accomplish this goal.
It is not recommended to have jointly owned bank accounts with anyone other than your spouse. When you have a joint bank account with another individual they will take full ownership of the account when you die. The new owner then has the right to change any beneficiaries, thereby eliminating who you ultimately wanted to receive the property. Also, you have linked your estate with theirs and if they are sued your funds could end up paying for the damages awarded by the court.
By using transfer by contract, you must be sure you have made provision for every one of your assets that is subject to probate. If you miss even just one asset your estate administrator may have to go through probate anyway for that one asset.
If you have many assets spread out among several different institutions it may be very time consuming to make sure all your beneficiaries are correct and up to date. Also, it may be difficult to ensure your beneficiaries are receiving the appropriate percentage of your overall estate. For example, if you have a retirement account that represents only a small percentage of your estate but then grows to become a significant percentage of your estate, and you don’t change your beneficiaries, it may be distributed in a way that does not match your overall desired estate plan.
Conclusion
There are certainly alternative means for transferring one’s property other than through a will or trust. The operation of law should be considered a safety net and not relied upon as a means for actual estate planning. Through transfer by contract it is possible to create a complete plan for the disposition of a person’s assets with very little cost, other than the time invested in accomplishing these designations. There are some significant challenges to using only this approach though, and it may be best to look at this technique as one tool available to help our constituents create the best possible estate plan to help them accomplish their goals. At the very least, it would be wise to have a will in place to back stop any assets that do not have a named beneficiary, and certainly to name a guardian for any minor children.