Q. My wife and I hold title to her home as joint tenants, and most of our cash assets are in the form of two large IRA accounts and one big annuity. We have basic wills which leaves everything to the other and then on to our children. Our son suggested that our wills may not control what happens to our assets when one of us dies. Should we be concerned?
A. Perhaps, in the sense that you wills will not control what happens to your assets when one of you dies. Rather, the form of title will control as to your home, and the beneficiary designations on your IRA’s and annuity will control what happens to those assets. Here is the way it works:
Your Home: Since you and your wife hold title to your home in joint tenancy, when one of you dies the other will automatically become the owner by right of survivorship. The right of survivorship is the primary feature of joint tenancy. In essence, the form of title overrides your wills. It is only when the survivor later dies that his or her will may control who ultimately gets the home. While many couples in California do hold their home in joint tenancy, it is often not the best form of co-ownership. One principal reason: it does not optimize the tax benefits that go along with holding title as ”community property” where the home has appreciated significantly in value since the time of purchase. Often, holding your home in a “Living Trust” may be the best option.
Your IRA Accounts: Each of your IRA accounts will, upon the death of the IRA owner, go to the primary beneficiary named in the account agreement signed when you created your IRA’s. Presumably, the primary beneficiary for each of you is the other spouse and, if deceased, your children. However, the pattern of distribution very much depends upon who you designated as primary and contingent beneficiaries when you created your accounts. It is always wise to periodically review these designations and retain in your permanent file a copy of the documentation you signed when you created your accounts. As a lawyer, I have been involved in at least one case where the IRA custodian, a large brokerage firm, lost the paperwork on a very large IRA account, almost costing the designated beneficiary a six-figure tax bill because of the resulting delay in distribution. The IRS has strict rules about inherited IRA accounts, and these must be observed on a timely basis to avoid unnecessary tax. In particular, the rules have changed as to how long your beneficiaries may “stretch” their receipt of distributions.
Your Annuity: the person or persons to receive your annuity would, just like the IRA, depend upon who was named as the primary beneficiary and contingent beneficiaries on the annuity contract, itself. The same would be true if you owned any other insurance products or policies. Where you have designated named individuals to be primary or contingent beneficiaries, the contract or policy controls and not your will or trust.
In view of the above, whenever clients come in to see us for estate planning, we always urge a review of all beneficiary designations associated with IRA and other retirement accounts, as well as annuities and other insurance products. Where appropriate, the beneficiary designations can then be modified, so that the plan design accomplishes the clients’ goals and everything works together. In many cases, the clients choose to name their Living Trust as the contingent beneficiary of these contracts and policies, so that the plan of distribution integrates with that created in their trust.