Here is a brief description of how assets pass to heirs:
Held Solely in Your Name
Asset passes to your heirs via your will (see section below) and is subject to the probate process.
Transfer on Death (for brokerage accounts) / Payable on Death (for bank accounts)
You are sole owner of the asset, but upon death, the asset passes immediately to the named individuals registered on the Payable on Death account outside of probate. For example, “John Doe POD James Doe” is an account owned by John that passes to James upon John’s passing.
Joint Tenancy With Rights of Survivorship (JTWROS)
All owners have an equal share of the asset; when you die, your share passes to the surviving owners. This continues until there is only one survivor, at which point it becomes an asset held solely in that person’s name (see above).
Tenants in Common
All owners have an equal share of the asset; when you die, your share passes to your heirs as stipulated in your will (via probate).
Tenants by the Entirety (TbyE)
Available only to married couples in certain states. Both spouses (TbyE) are considered to own 100 percent of the asset, protecting the asset from creditors if only one of them is sued. At the first death, the asset passes to the surviving spouse, at which point it becomes an asset solely in that person’s name (see above).
Community Property
If you are married and live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, most assets acquired during your marriage are considered community property, unless you and your spouse strike a separate agreement. Assets obtained prior to the marriage might also be included; implications are complex and beyond the scope of this checklist. Legal advice is strongly recommended for residents of these states who are (or may become) married or divorced.
Community Property With Rights of Survivorship (CPWROS)
The surviving spouse inherits the deceased’s share of assets. The above cautions apply here as well.
Limited Liability Company
This is used to shield you from liability, and your share of the entity is usually dictated by the above options.
Trusts
Trusts allow you to manage, control and distribute your assets with greater specificity than you can with a will. Trusts also allow you to address tax, legal and liability problems.
A trust is nothing more than a set of rules governing the management of assets. As the grantor (the person creating the trust), you get to make those rules. You’ll appoint someone to manage the trust (the trustee). You can be the trustee in some cases; regardless, you should also name a successor trustee, who will manage the trust if the trustee dies or becomes incapacitated. You’ll also designate beneficiaries of the trust.
Some trusts are revocable (meaning you can change the rules as often as you wish, and you add or remove assets from the trust at any time), while others are irrevocable (meaning you can never change the rules or withdraw assets from the trust unless permitted by its rules). Revocable trusts are generally ignored by the IRS (meaning all tax aspects of the trust pass to you personally) while irrevocable trusts generally obtain their own tax ID number and file their own tax returns. (Be aware that such trusts are taxed at the highest tax bracket; whether the trust should pay taxes on its income or distribute that income to beneficiaries so they can pay the taxes instead – at their lower tax brackets – is a question for your financial advisor and tax advisor. The age(s) of the beneficiary(ies) and other aspects of their situation must be considered.)
Revocable trusts also do not offer liability protection; irrevocable trusts do.
The trust that’s right for you depends on the problem you’re trying to fix – and since your life might be complicated, you might need more than one trust.