Myth: A Will Determines How Your Assets Are Distributed When You Die

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Myth: A Will Determines How Your Assets Are Distributed When You Die

It is a common assumption that your last will and testament determines who gets your stuff when you die. What you may not know is the vast majority of your assets –your cars, house, retirement accounts, etc.— may be transferred to others regardless of the instructions in your will.

A will does not govern the distribution of your assets which pass by “will substitute.” Jointly-owned bank accounts or jointly-held titles, common for cars and houses, are good examples of assets which are transferred by “will substitute.” When one owner dies, the other joint-owner (or owners) maintain control of the asset (bank account, or house, or car).

Another example of assets which may transfer directly to others, despite what the will says, are Individual Retirement Accounts (IRAs), employer-sponsored plans such as 401(k) accounts, and insurance policies. These assets permit you to name beneficiaries for them. When the owner dies, the person or people named as beneficiaries on the account receive the asset directly.

Accounts with “pay on death” or “transfer on death” instructions can also do the work of seamlessly transferring the assets to your beneficiaries. For example, a new law in Virginia allows you to add a beneficiary’s name to a real estate deed. When the owner dies, the beneficiary named on the deed will receive the real estate directly, regardless of what is stated in the will.

Let’s consider the example of Thomas and Martha Jefferson. Mr. Jefferson’s total estate is worth $1 million. Mr. Jefferson’s will stipulates that 75% of his estate should be given to Martha and 25% of his estate should be given to charity –which at the time of the will’s drafting seemed like a generous donation. So how much does Martha stand to inherit, and how much goes to charity? Does Martha get $750,000? Does the charity receive $250,000?

At his death, Mr. Jefferson owned an IRA valued at $400,000 and a home, which he owned jointly with Martha, valued at $500,000. Aside from these assets, Thomas had some personal effects, such as clothes and furniture valued at $100,000.

Because of the way in which Mr. Jefferson titled his assets, most of his wealth was transferred via “will substitute.” When he opened his IRA account many years ago, Mr. Jefferson named his two children as beneficiaries. At his death, each child received $200,000 automatically, because they were listed as beneficiaries on the account. The house transferred to Martha, who was the joint-owner. So far, the will has had nothing to do with who gets the most valuable assets.

For Mr. Jefferson, the only assets which were transferred according to his instructions in the will were his personal property (the clothes and furniture) valued at $100,000. According to the terms of the will, Martha is entitled to 75% of the clothes and furniture, the other 25% goes to charity.

In the final accounting of Mr. Jefferson’s estate, Martha inherited $575,000,—quite a bit less than $750,000. Mr. Jefferson’s two children each inherited $200,000, although they were not mentioned in his will at all. And the charity received $25,000, significantly less than 25% of his entire estate!

Everyone should have a will. However, don’t assume that the instructions in your will apply to all the stuff you own. Take time to review how your assets will actually be passed on to your loved ones.


Photo used with permission under the Flickr Creative Commons license

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Wealth Manager

Beth Nedelisky is part of the Investment Committee at Marotta Wealth Management and specializes in trust and endowment management. Born in Africa, raised in Europe and married in the USA, Beth understands world markets first hand.