Ownership and Estate Planning

The whole unit on one sheet: ownership forms, Pay on Death (POD) / Transfer on Death (TOD), beneficiary rules, trusts, wills, divorce splits, and charitable vehicles.

The One-Liners That Win Points

• Beneficiary designations override the will, every time (Individual Retirement Account (IRA), 401(k), life insurance, POD/TOD). If a client divorces but never updates the IRA beneficiary, the ex-spouse still inherits it.
• Avoids probate and avoids estate tax are two different things: JTWROS, POD/TOD, and revocable trusts skip probate but stay in the taxable estate.
• Tenancy by the entirety is the only ownership form with built-in creditor protection (a creditor of just one spouse cannot force a sale).
• Community property gets a double step-up in basis: both halves step up at the first spouse's death.
• Irrevocable trust removes assets from the taxable estate AND provides creditor protection; a revocable (living) trust does neither, but adds incapacity planning.
• If you see "avoids probate AND reduces estate taxes," the answer is irrevocable trust.
• A will only controls the probate estate; assets with designations or survivorship transfer outside it.
• A Qualified Domestic Relations Order (QDRO) splits qualified employer plans in divorce; IRAs use a transfer incident to divorce (no QDRO).
• A Donor Advised Fund (DAF) gives the deduction at contribution, not when the grant is later recommended.

Ownership Transfer Methods

• JTWROS: two or more owners, equal undivided shares; survivor takes all by operation of law, bypasses probate. NOT limited to married couples. All owners must consent to sell.
• Tenants in common (TIC): shares can be unequal (e.g., 60/40); no survivorship, so a deceased owner's share goes through their estate and probate. Each owner can sell independently.
• Tenancy by the entirety: married couples only; survivorship plus creditor protection from one spouse's debts; neither spouse can sell without the other.
• Community property: nine states; property acquired during marriage owned 50/50; the double step-up in basis is unique to it.

POD and TOD Designations

• POD = bank accounts (checking, savings, certificates of deposit, money market); TOD = brokerage / securities accounts. Often confused, so lock the split.
• Both transfer directly to named beneficiaries at death and bypass probate.
• Owner keeps full control while alive; the beneficiary has no rights until death and can be changed anytime without the beneficiary's consent.
• Low-cost alternative to a trust, but assets stay in the taxable estate and there is no incapacity or conditional-distribution planning.

Beneficiary Designation

• Primary beneficiary is first in line; the contingent (secondary) receives only if the primary predeceases or disclaims. Name both.
• No beneficiary named (or all predeceased) means assets default to the estate and go through probate, defeating the whole point.
• Per stirpes ("by branch"): a deceased beneficiary's share passes down to their descendants (keeps it in the family branch).
• Per capita ("by head"): the deceased's share is redistributed among surviving beneficiaries only; often the default, which can disinherit grandchildren.
• Forms are held by the custodian or plan administrator, not the attorney who drafted the will; updating the will alone does not change the beneficiary.

Trusts and Wills

• Will: goes through probate, becomes public record, can be contested; an executor (personal representative) carries it out. No valid will means intestate succession under state law.
• Trust roles: grantor (settlor) creates and funds it, trustee manages, beneficiary receives.
• Revocable (living) trust: grantor keeps control, avoids probate, adds incapacity planning; stays in the taxable estate, no creditor protection; becomes irrevocable at death.
• Irrevocable trust: grantor gives up control; excluded from the taxable estate, provides asset protection, hard to modify.
• Testamentary trust: created by the will, so it goes through probate (unlike a living trust).
• Bypass (credit shelter / B) trust: funded at the first spouse's death up to the exemption so both spouses' exemptions are used; assets stay out of the surviving spouse's estate.
• Charitable remainder trust (CRT): income to grantor first, remainder to charity, current income tax deduction, avoids capital gains on appreciated assets.
• Charitable lead trust (CLT): mirror image; income to charity first, remainder to family, reduces gift and estate tax.

Qualified Domestic Relations Order (QDRO)

• Court order dividing a qualified employer plan (401(k), 403(b), pension) in divorce; lets an alternate payee (usually the ex-spouse) receive part of the benefits.
• Needed because the Employee Retirement Income Security Act (ERISA) normally bars assigning plan benefits.
• Distributions are exempt from the 10% early withdrawal penalty even if the alternate payee is under age 59 1/2.
• The alternate payee pays the income tax and can roll over the distribution into their own IRA to defer it.
• IRAs do not use QDROs: a transfer incident to divorce moves the assets, no penalty on a direct transfer.

Donor Advised Funds (DAFs)

• Managed by a sponsoring organization; the donor makes an irrevocable contribution and gets an immediate income tax deduction in the year of the gift.
• The sponsoring organization has legal control; the donor only recommends grants over time.
• Donating appreciated securities avoids capital gains tax on the appreciation AND deducts the full fair market value (FMV): a double benefit.
• Deduction limits: up to 60% of adjusted gross income (AGI) for cash, up to 30% of AGI for appreciated securities; more favorable than a private foundation.
• No minimum annual payout (a private foundation must distribute at least 5% of assets each year); grants must go to IRS-qualified 501(c)(3) organizations.

Top Gotchas

• JTWROS is not marriage-only; the marriage-only survivorship form is tenancy by the entirety.
• Avoiding probate is not avoiding estate tax. POD/TOD, JTWROS, and revocable trusts all keep assets in the taxable estate.
• Per capita default can disinherit grandchildren; a client who wants a deceased child's share to flow down must elect per stirpes.
• A testamentary trust does NOT avoid probate because the will creates it.
• The QDRO penalty exception applies only to qualified employer plans, not IRAs.
• DAF deduction lands at contribution, not when the grant is recommended (the "bunching" strategy front-loads deductions in high-income years).

Memory Aid: Reading the Ownership Acronyms

• JTWROS = "Right Of Survivorship" (survivor gets all, avoids probate)
• TIC = "In Common" (your share goes to your estate, requires probate)
• TBE = "By the Entirety" (married only, both must agree, creditor-protected)

One-Breath Recap

Titling drives everything: JTWROS, POD/TOD accounts, and beneficiary designations bypass probate but stay in the taxable estate, and those designations always override the will, so a stale ex-spouse beneficiary still inherits. Tenancy by the entirety adds creditor protection, and community property earns the double step-up in basis. On trusts, a revocable living trust avoids probate and plans for incapacity but does not cut estate tax, while an irrevocable trust removes assets from the estate and shields them from creditors; a testamentary trust still hits probate because a will creates it. Round it out with the divorce split (QDRO for employer plans, transfer incident to divorce for IRAs, penalty-free for the alternate payee) and the DAF, where the irrevocable gift earns an immediate deduction and appreciated securities dodge capital gains for a double benefit.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Ownership and Estate Planning unit for the complete lesson.