How are my assets distributed upon my death?

Written by Vid Ponnapalli, MS, CFP®, EA

Vid Ponnapalli is a Fee-Only financial advisor providing Customized Financial Planning, Investment Management, and Tax Services for Busy Professionals in New Jersey, New York City, and across the country.

December 12, 2015

In the recent past, I met several young families with children who are concerned about what happens to their hard-earned assets when they die. As we talked through, I realized they all have two simple goals: 1) to ensure their immediate family members receive the assets upon their death, and 2) where possible, the distribution should be seamless. Accordingly, this blog post…

Very simply stated, there are three ways your assets can be distributed upon your death:

  • Per your wishes in “Last Will and Testament.”
  • Via techniques/methods that avoid probate
  • State deciding the distribution rules

So, let’s discuss:

Last Will and Testament

A Will is a legal document you write while you are alive in which you indicate your wishes such as who will be the executor of your will, how your minor children will be taken care of, and who should get which of your assets. When you pass away, either executor of the will or one of your beneficiaries submits the legal document to the state’s probate court. The probate court will then ensure your wishes are carried out as per the directions in your Will. The process might take some time and might involve some costs associated with it, but the distribution is guaranteed per your wishes.

It is important to note that having a Will does not avoid the probate process, but makes the process much simpler and less time-consuming.

Techniques that avoid probate

Probate is a state-mandated process, and if the distribution of your assets requires going through probate, it is usually time consuming and expensive. Given that, let us review some techniques that help you avoid probate.

Designate beneficiaries

A beneficiary designation is the easiest and least expensive way to distribute most common financial assets outside of probate. Also, beneficiary designation is fully revocable giving you greater control to change the designations as you please.

You can setup beneficiaries for your 401(K) and IRA accounts, for your Bank Checking / Saving accounts, for your Investment accounts, for your Life Insurance policies and annuities. Moreover, in today’s world, most of this you can do it by yourself online, thanks to advances in Technology.

However, the one caveat to note is that beneficiary designation overrides what is in your Will. This means you need to ensure that your beneficiary designations are up-to-date and are as per your latest wishes.

Co-own properties

A second technique that avoids probate deals with assets such as your home or other real estates. If you own these properties jointly with “rights of survivorship,” you will allow surviving owners of the asset to receive your share automatically when you pass away. No Will or Probate required.

Once again, as this arrangement also overrides what is in your will, you need to be cautious about accidentally disinheriting your loved ones. For example, let us say you jointly owned property with your oldest child. When you pass away, your oldest child becomes the sole owner of the property, and your other children will be disinherited (even if your Will says your property should be split amongst all your children!). Is this really what you want? Think about it.

Revocable Living Trust

A third technique to avoid probate involves setting up and managing a Revocable Living Trust (a.k.a. RLT) for all your assets. The “revocable” nature of such a trust allows you to keep control over the trust assets during your life.

For example, a classic RLT setup for a couple with children could involve 1) setting up the trust, 2) placing assets in the trust, 3) naming the spouses as co-trustees, and 4) adding the children as beneficiaries of the trust. As you see, setting up and managing such a trust is not easy and requires professional help of an attorney. Accordingly, you need to be mindful of the costs involved and weigh the benefits against these costs.

So, you may be wondering: What situations warrant setting up an RLT? Alternatively, when are the costs justified? While I do not intend to elaborate on all the use cases for setting up an RLT, I can point you to one such situation in this blog. Let us say you own Real Estate properties in multiple states, and you specify how these assets are distributed in your Will. In the absence of an RLT, your property distribution requires going through the probate process of each state. Obviously, this is time consuming and expensive and setting up an RLT could save you in that situation.

State deciding the distribution rules

There is a common misconception that the state takes your assets if you die without a valid Will, and you have assets that are not otherwise set up with alternate methods of distribution. This is not true. Although state laws dictate the exact process, generally the people in your bloodline will get the preference. In other words, spouse, children, parents, and siblings are in line to receive your assets. Friends and charities get nothing. The state will take your assets only in the very rare situation where no blood relatives can be found.


So, what you think? Did you set up your assets such that they pass to your intended beneficiaries? If not, now is the time to act.

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