Does All My Property Pass Under My Last Will & Testament? You Might be Surprised.

A popular misconception is that your Last Will & Testament controls how all of your property passes when you die.  Only probate property passes under your Last Will & Testament.  Non-probate property passes by different means.  Whether your property will become probate property when you die depends on the type of property, how your property is owned, and if there is a beneficiary designation associated with your property.

Types of Property

The types of property can be divided into three broad categories: Real Property, Tangible Personal Property and Intangible Personal Property.  Very simply, Real Property is real estate – land, houses, office buildings, etc.  Ownership of real property is represented by a Deed that is recorded among the land records.  The Deed lists the owner or owners of the real property.

Tangible Personal Property is other property that is tangible, i.e. you can touch it – cars, boats, furniture, jewelry, etc.  For some types of tangible personal property ownership is represented by a title document.  Most notably, a motor vehicle has a Title that lists the owner or owners.  For most types of tangible personal property, however, there is no title document.  This is where the law steps in to create presumptions of ownership based on the facts and circumstance during the property’s acquisition and possession.

Intangible Personal Property is everything else such as, currency, stock & bonds, bank accounts, brokerage accounts, retirement accounts, annuities, life insurance policies.  Currency can be considered tangible personal property when it is part of a collection but most often currency is considered intangible personal property.  Except for currency, the ownership of most intangible personal property is represented by a document that lists the owner or owners.  Certain types of intangible personal property, such as retirement accounts, annuities, and life insurance, do not become probate property except in special circumstances discussed below.

How Property is Owned

The simplest form of ownership is owning property alone in your own name without a beneficiary designation.  Such individually owned property becomes probate property when you die that passes under your Last Will & Testament.  If you don’t have a Last Will & Testament, this type of property passes to your heirs at law under Maryland Intestacy Laws.  (If you die without a Last Will & Testament you are said to have died Intestate.)

Property can be co-owned with one or more other persons in several ways.  You can own property jointly as Joint Tenants With Rights of Survivorship (JTWROS).   Under this form of ownership, when you die the co-owner(s) automatically owns the property by operation of law.  Property under this form of ownership does not pass under your Last Will & Testament (unless you are the last co-owner to die, in which case you owned the property individually).  This type of joint ownership can subject the property to the other joint owner’s creditors, which could cause you to lose the property. So be careful if you want to add your children to your bank account, house or vacation property.

A married couple may own property jointly in a special form of ownership called Tenants By The Entireties.  This form of ownership is similar to Joint Tenants With Rights of Survivorship because when you die your spouse automatically owns the property by operation of law.  Property under this form of ownership does not pass under your Last Will & Testament (unless you are the last spouse to die).  Also, there is protection from the creditors of one spouse, i.e. one spouse’s creditor can’t force the sale of the property.

Another form of co-ownership is call Tenants In Common.  Under this form of co-ownership, you own a fractional interest in the property.  For example, if you and your two siblings own a vacation home as tenants in common, you would have a 1/3 undivided interest in the property.  Undivided means you get to use the whole property rather than a 1/3 slice.  When you die, your 1/3 ownership interest passes under your Last Will & Testament as probate property and does not pass to the co-owners.  The beneficiaries under your Last Will & Testament would then be co-owners with your siblings.  If there is friction among them, one of the co-owners can force the sale of the property through a law suit known as a Sale In Lieu of Partition.

Rather than having co-owners, you can own your real property with successive owners. A Life Estate Deed grants the Life Tenant the exclusive right to occupy and use the real property during the Life Tenant’s lifetime.  When the Life Tenant dies, the property passes by operation of law to the Remaindermen, who are the persons specified in the life estate deed to “inherit” the property when the Life Tenant dies.  It goes without saying that real property owned this way does not pass under your Last Will & Testament.  The life estate is a type of beneficiary designation and is typically only used with real property.

Beneficiary Designations

Property with a Beneficiary Designation does not pass under your Last Will & Testament but pass to those persons listed on the beneficiary designation.  Certain types of intangible personal property require the use of beneficiary designations to pass these assets as you intend when you die.  Most familiar are life insurance policies, annuities and retirement assets, such as IRAs, 401(k)s, 403(b)s, etc.  The beneficiary designation lists the primary beneficiary who will “inherit” the assets when you die.  You can also list secondary beneficiaries in case the primary beneficiary dies before you.  For example, the spouse is listed as the primary beneficiary and the children as the secondary beneficiaries.  You can also list a Trust as a beneficiary; however, the trust must be specially designed for retirement assets to preserve the income tax benefits for the trust beneficiaries.

It is always a good practice to list primary and secondary beneficiaries.  If you don’t list a secondary beneficiary and the primary beneficiary dies before you, the assets will pass according to the document governing the asset, such as the life insurance policy, the annuity contract, the IRA custodial agreement, the 401(k) plan and the like.  Each of those documents has default provisions specifying how the asset passes at your death, very often to your probate estate.  Having retirement assets pass to your probate estate and become probate property may cause devastating income tax effects.

Beneficiary designations can be used with other types of intangible personal property, such as bank accounts and brokerage accounts.  Bank accounts can have a Payable On Death (P.O.D.) beneficiary designation.  Brokerage accounts can have a Transfer On Death (T.O.D.) beneficiary designation.  The P.O.D and T.O.D. operate exactly like other beneficiary designation to pass these accounts at your death without going through your Last Will & Testament.

In Maryland, a motor vehicle can also have a beneficiary designation on the Title that passes ownership of the vehicle at the owner’s death without having to pass under your Last Will & Testament.  The vehicle must be individually owned (one owner) and only one beneficiary can be named, which can be either an individual or a business entity.  At any time prior to death, you can delete or change the beneficiary designation or sell the vehicle without the consent of the beneficiary.  There is, however, a fee to add, delete or change a beneficiary designation.

PLEASE NOTE: These materials are current as of the date of posting and are not a comprehensive discussion of the entire subject matter. They are presented for informational purposes only and should not be considered legal or financial advice as to any specific matter or transaction.  They are not intended for the purposes of advertising or soliciting clients, and should not be misconstrued as establishing an attorney-client relationship.  Readers should consult a knowledgeable attorney experienced in such matters for legal advice.

Copyright 2017 Rutledge & Aitken, LLC