Understanding Contractual Arrangements
Many people think that all their assets will be divided in equal shares among their children if they have a will or a trust that says, “I hereby leave all of my property in equal shares to my children.” Unfortunately, that may not be what will happen. A will or a trust has no effect on how certain types of property are distributed. There are several types of property that pass according to the terms of the contract and are not affected by your will.
Life insurance
Annuities
IRAs and retirement accounts
Certain business contracts
Pay-on-death contracts
Life insurance and annuities are paid to the person you named as a beneficiary when you purchased them. Both of these types of property are paid according to the terms of the contract. Sometimes people have the same misunderstanding about life insurance and annuities as they do about joint property. People tend to think that a will or a trust controls all of their property. You will find as you proceed through the process of planning that you need to evaluate how each piece of property, including life insurance and annuities, will be paid when you are gone.
You may want to consider a “pay-on-death” arrangement for a bank account or your stocks. In these arrangements, the proceeds are transferred immediately to the person named in the document. The person named on the account has no right, however, to the asset until your death.
IRAs (Individual Retirement Arrangements) and other retirement accounts also are paid to the person you named as a beneficiary. Your will or trust will have no effect on who receives those benefits. Also, more complex business contracts for partnerships and corporations often have buyout provisions that will control and cause the partnership or corporate stock to be excluded from the probate process.
