5 Things to Watch Out for When Transferring Assets

Man experiencing "lightbulb" moment after realizing he should pay attention to asset values, survivorship planning, control, tax planning, and tax apportionment

Operation of law assets are titled assets with built-in transfer mechanisms. These include jointly owned assets with rights of survivorship, in which your co-owner automatically inherits your share, as well as financial accounts with beneficiary designations like a 401(k), an IRA, or a payable-on-death checking account.

Thanks to their built-in transfer mechanisms, operation of law assets can transfer from one owner to another without a will because the beneficiary is named on the instrument or the account itself. There is no need for operation of law assets to go through the probate process, saving your estate the time, money, and public record that go along with probate. In most cases, all you need to effectuate the transfer is an original death certificate.

Nonetheless, you still need to exercise care in planning your estate with operation of law assets. Here are 5 things to watch out for when utilizing operation of law assets in your estate plan:

#1 Asset Value Monitoring

If you plan to make gifts to more than one beneficiary through operation of law transfers, you may need to periodically recalibrate your gifts to result in your desired split.

For example, an asset held by joint tenancy with right of survivorship transfers only to the last surviving owner. If you hold such an asset and wish to make gifts in equal proportions to several beneficiaries, you would need to monitor the value of that asset against others in your portfolio and recalibrate the rest of the portfolio as values change.

#2 Survivorship Planning

Operation of law assets can be less resilient methods for survivorship planning than transferring assets through a last will or revocable living trust.

Certain classes of jointly held real estate may only allow for designations of primary beneficiaries without the ability to specify what happens to the asset if those primary beneficiaries are unavailable.

Most financial accounts with beneficiary designations allow you to make both primary beneficiary and backup beneficiary designations. However, not all of these accounts allow you to determine if and how you want to pass on the gift to a beneficiary’s children or grandchildren if the beneficiary predeceases you.

For example, on this Fidelity IRA Designation, account owners can choose between the default per capita distribution (i.e., give only to surviving primary beneficiaries) and an optional per stirpes (i.e., pass the share of predeceased primary beneficiaries on to their descendants, if applicable) election. Distributing per capita by generation, the most popular contingent distribution method, is not an option, and moreover, the account owner must choose the same contingent distribution method for all primary beneficiaries.

#3 Control

Beneficiary designations on operation of law assets do not allow for gifting subject to certain conditions in the same way that a last will or a revocable living trust can. If you are planning to give to a beneficiary who is a minor or who may not be able to manage the asset independently, your interests may be better served by transferring the asset through your last will or revocable living trust.

#4 Tax Planning

Most people do not have to worry about paying state or federal estate taxes. If you are in the small minority of Americans who do, you should speak with your estate planning attorney to make sure that transferring certain assets via operation of law does not undermine the tax structures contemplated in your last will or revocable living trust.

#5 Tax Apportionment

If your estate is subject to state or federal estate taxes, you should plan for how you want to spread (called apportioning) the burden of paying those taxes across your beneficiaries and gifts.

A common ‘default’ in many estate plans is to pay estate taxes and other debts out of the residue or remainder of the estate (i.e., what’s left after making all specific gifts of property). If you use this default and make a lot of specific gifts or transfer a significant portion of your assets outside of your last will or revocable living trust, your residuary beneficiaries may inherit less than you anticipated.

Summary

If you are comfortable making gifts outright and not concerned with crossing state or federal estate tax thresholds, transferring assets via operation of law is very efficient and cost effective.

If you want to capture these same benefits and add more flexibility, control, and tax mitigation strategies, consider creating a revocable living trust and funding the trust with those operation of law assets. Your assets will still transfer outside of the probate process, and you’ll gain additional ability to manage them in the umbrella of your revocable living trust.