Personal Finance Essentials
How Your Assets Pass to Your Heirs
Who Actually Gets Your Money When You Die
May Surprise You
When a person dies, everything they owned is transferred to heirs in one of two ways: through operation of law or through the probate court. Understanding the difference is essential to making sure your assets actually end up where you intend.
Operation of Law
• Life insurance policies, IRAs and retirement accounts – the named beneficiary receives the asset immediately upon your death
• Joint accounts (legally called Joint Tenancy with Rights of Survivorship or Tenants by the Entirety) – when one owner dies, the asset passes immediately to the surviving owner
• Pay‑on‑Death (POD) bank accounts and Transfer‑on‑Death (TOD) brokerage accounts – assets transfer directly to the named heir without going through probate
Probate Court
In most states, probate lasts a minimum of one year, and backlogs can extend it several years longer. During this time, your assets are frozen and generally unavailable to your heirs. Lawyers can charge as much as 5% of the estate’s value. And because probate is a public process, anyone can read your will and learn the details of your estate.
To minimize probate costs, name a trusted family member as your executor and give them authority to hire an attorney for assistance as needed. Naming a law firm or a bank as executor almost always results in significantly higher fees.
The Wrong Way to Avoid Probate
Many people try to avoid probate by adding a child’s name to their bank accounts, investment accounts or home deeds. This seems logical, but it creates far more problems than it solves.
Consider this example: A mother owns a home worth $180,000 that she purchased 40 years ago for $30,000. To avoid probate, she adds her daughter’s name to the deed as a co-owner. When the mother dies, the daughter has indeed avoided probate – but because she is now a co-owner rather than an heir, she inherits the home with the original $30,000 cost basis intact. When she sells the home, she owes capital gains taxes on $150,000 of profit. Had she inherited the home through a trust or as an heir via the will, she would have received a stepped-up basis at the current market value and owed no capital gains tax at all.
Titling assets jointly between generations also exposes your property to your child’s creditors and lawsuits, gives the child unrestricted access to your accounts and can accidentally disinherit your other children. When you add only one child’s name to your accounts, that child becomes the sole heir to those assets – even if your will says all children are to be equal heirs. Operation of law takes priority over a will every time.
The Right Way to Avoid Probate
The proper solution is a Revocable Living Trust combined with TOD and POD registrations where appropriate. By placing your assets into a trust and naming your beneficiaries within the trust document, you avoid probate entirely, maintain full control during your lifetime and ensure your assets pass exactly as you intend – privately and without court involvement.
For those who want a simpler approach for specific accounts, TOD and POD registrations accomplish something similar for brokerage accounts and bank accounts. By registering an account as “John Smith TOD Jane Smith and David Smith,” those named will inherit the asset upon John’s death without probate and without capital gains taxes. TOD and POD registrations do not offer all the advantages of a Revocable Living Trust, but they are quick, free and far safer than joint titling.