BUT I HAVE A WILL, ISN'T THAT ENOUGH?



By: Victoria Friedrich

November 13, 2024

A common misconception people have when thinking about their estate plan is that it begins and ends with a Last Will and Testament. While having a comprehensive Will (or a simpler, pour-over Will with a Revocable Trust) in place is an essential part of an estate plan, it is a piece, but not the whole thing. Certain assets pass outside a Will (non-probate assets), so even if you have a detailed Will in place, if you have not coordinated all your assets to pass in the way that you wish, you could end up with assets passing to unintended persons or in different shares than you directed in your Will. In order to ensure that your assets pass to the people you want to benefit, in the shares and the manner you want them to receive, watch out for these common misconceptions about estate planning:

1.     All my assets pass through my Will, so once I have that in place, I’m good!

Not all assets pass through a Will upon a person’s death. The way that an asset is titled and/or how beneficiaries may be identified dictates how it will pass upon death. Common ways assets are held are: (i) individually with no named beneficiary, (ii) individually with a beneficiary designation, or (iii) jointly titled with one or more people with a right of survivorship, or (iii).

Individually Owned Assets. Assets owned by one person with no joint owner or designated beneficiary are “probate assets” that pass pursuant to the terms of a Will (or intestacy statute if there is no Will). These are the assets most people think of when creating their estate plan and may include bank and/or brokerage accounts, stocks, bonds, and real estate, among others.

Beneficiary Designation. Some assets allow an owner to designate a beneficiary who will receive the asset after the owner’s death. This is common for life insurance policies, retirement accounts, and brokerage accounts (among others). When you designate a beneficiary or beneficiaries to receive these assets upon your death, the asset passes outside of the Will to the named beneficiary directly. It is also possible to direct these assets to pass through your Will, but you must designate your estate as the beneficiary. In some instances this strategy can cause unintended tax consequences, so a thorough examination of your estate plan as a whole is necessary to determine whether making such a designation will cause a tax burden. Furthermore, if you intended for assets to be held in a trust but you directed it instead to a named person, the asset will not be protected as intended.

Jointly Owned Assets with a Right of Survivorship. As the name indicates, assets may be owned jointly by two (or more) people with a right of survivorship. Assets owned in this way automatically pass to the surviving owner(s) upon the first owner’s death. Bank or brokerage accounts owned by two people with a right of survivorship will automatically pass to the surviving joint owner upon the death of the first owner and do not pass pursuant to the terms of a Will.

This is also true of real estate held by more than one owner, although there are some special rules that may apply. When real estate is owned by a married couple (purchased during the marriage), the presumption and default law is that it is owned as “tenants by the entirety.” This means that upon the death of the first spouse, the surviving spouse automatically becomes the sole owner of the real estate without having to record a new deed or take any action whatsoever. This presumption does not extend to unmarried people who own real estate together. Unless the deed specifies that the title is held jointly with a right of survivorship non-married joint owners of real property are presumed to own such property as “tenants in common”, which means that each person’s interest passes separately. If a person has a Will, the property will pass pursuant to the terms of the Will, and if that person does not have a Will, such property will pass pursuant to the State’s intestacy laws which will distribute a person’s property to their closest living relatives, as the State determines.

2.     My estate is under the federal estate tax exemption of $13.61 million, so I don’t have to worry about taxes at all!

It’s true that the federal estate tax exemption is currently at an all-time high of $13,610,000 per person, which means that even an individual with a higher net worth may be exempt from federal estate tax. However, if Congress does not enact legislation to the contrary, the federal estate tax exemption is set to decrease to $5 million indexed for inflation (estimated to be about $6-7 million) on January 1, 2026 and taxes still come into play in the form of state estate taxes (currently $6.94M per person in New York), and inheritance taxes, which are applicable to some estates in New Jersey. We previously discussed the New Jersey Inheritance tax, under which tax is due on any portion of an estate that passes to a person who is not the decedent’s spouse, parent, and/or lineal descendent (i.e. child, grandchild, great grandchild etc.). This means that even if you leave your “residuary estate” to descendants, if you make specific bequests of cash or real estate (let’s say 25% of your total estate) to friends or family (sibling, niece, nephew, or cousin) that 25% is subject to NJ Inheritance Tax and the payment of the potential tax should be considered in your estate plan (discussed further below).

3.     I’m not worried about the “tax clause” in my Will.

Taxpayers generally direct that any estate tax or inheritance tax is paid out of their “residuary estate.” Without consideration of an estate plan as a whole, a tax clause in the Will can cause unintended consequences. In the above example, if the decedent’s Will directs that any estate or inheritance taxes should be paid out of the residue of the estate (which is a very common clause), the 25% that is taxable is paid over from the residue and the residuary beneficiaries will end up bearing the burden of such tax, without reaping any of the benefit of the assets. For most people, this result would be counter to their estate planning intentions.

4.     I don’t have to worry about other gifts or transfers I made in the past; I’m just thinking about what’s passing at my death.

Gifts to individuals or trusts during your lifetime must also be considered when creating a comprehensive estate plan. If you have made gifts in excess of the annual exclusion in any tax year, the value of such gift would be deducted from your lifetime gift and estate tax exemption, and you would have been required to file a gift tax return for that year. This may have an impact on how your Will is structured. Specifically, you may wish to benefit one person in your Will more than another in order to equalize gifts made to such beneficiaries as a whole.

Moreover, care should be taken before making transfers of appreciated assets during life that could trigger a capital gains tax. While assets that pass on death receive a step-up in basis, assets that are gifted during life retain their initial basis. For example, if you purchased a house for $300,000 and the value has increased to $650,000 and you gifted this property to your children, they would step into your shoes and take the $300,000 tax basis. This means that if and when they sell the house, they will pay capital gains tax on the difference between the basis and the sale price (here, $350,000). Assets that pass on death receive a step-up in basis, which means that if your child inherits a property with a stepped-up basis of $650,000 and sells it for that amount, they will pay no capital gains tax.

5.     I’ve distributed all my assets to my residuary beneficiaries, so I’ve taken care of everything.

One last item that should be noted is what we commonly refer to as the “catastrophe clause,” which directs how your assets should pass in the (often unlikely) event that you are not survived by any of your named beneficiaries. If you have not considered this situation, and your named beneficiaries do not survive you, your assets will pass according to your State’s intestacy laws, which is to your closest living relative, based on your State’s determination of who that may be. This may not be how you wanted your assets to pass and should absolutely be taken into consideration when making your plan.

Without a comprehensive, holistic approach to estate planning, it’s easy to see how someone’s wishes may not be fulfilled, even with a detailed Will carefully put in place. If you want help to ensure that all the pieces of your estate are working together to achieve your planning goals, call one of our experienced trust and estate attorneys.

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