Author Topic: TODs and Wills  (Read 962 times)

bookguy

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TODs and Wills
« on: November 09, 2018, 08:46:32 PM »
A little background:

I am separated from my wife and plan on finalizing the divorce sometime next year. Unfortunately, she won't sign the form giving up her claim, as my wife, so I can make our daughter the primary beneficiary of my 401(k), so I have to wait until the divorce is settled before doing that.

Two questions:

1.  I have a small portfolio that I would like to leave to my adult daughter.  Right now, it's seriously not much at all, but I contribute a few hundred dollars to it each month via DCA. Would it be better from a tax perspective to have this portfolio transfer to her upon my death (TOD), or should I specify that in my will? I'm not planning on kicking off anytime soon, but I am 60 and I realize I'm getting closer to kicking it every day.

2. If I die before the divorce is finished, would my estranged wife be obligated to follow any directions in my will that would give our daughter 50% of my 401(k) money? Or could she ignore any requests in my will?

Not looking for legal advice, but am wondering what the best thing for me to do would be so my daughter isn't left out from the 401(k) money. It's a decent chunk of money, much larger than the personal portfolio.

Thanks in advance.

ILikeDividends

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Re: TODs and Wills
« Reply #1 on: November 10, 2018, 12:03:17 AM »
If your state is a community property state then I doubt you can unilaterally TOD any property owned by the community to anyone else without your estranged wife's consent.  You can't bequeath property that is partly owned by someone else against their will.

TOD of title generally removes the property from the estate or revocable trust.  But, again, if you live in a community property state, whether you can or can't do that all on your own is subject to your states probate and matrimony laws.  Is it legally your "sole and separate property"?  If you don't know, then it possibly isn't.

Disclaimer: I am not an attorney. You should consult an attorney familiar with the laws of your state before making any decisions.
« Last Edit: November 10, 2018, 12:45:46 AM by ILikeDividends »

MoseyingAlong

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Re: TODs and Wills
« Reply #2 on: November 10, 2018, 01:38:17 AM »
Bookguy,

I think these are both legal questions and it'd be good to consult a legal resource.

From a tax perspective, just how large is your 401k? Are you in estate tax territory? I'd guess not since your brokerage account isn't that large.
So if you're wondering about it from an income tax perspective for your daughter, it doesn't really matter which way she gets it. She'll have to pay income tax as she withdraws the money. However, retirement accounts often (usually?) pass by beneficiary designation, not the will. So if your wife is the only beneficiary, it will all go to her no matter what your will says. If your wife and daughter are designated 50/50 beneficiaries, your daughter will get 50% without the will.

If an account has a beneficiary designation, that trumps what the will says. (Apparently there are some places where a will can override a beneficiary designation, don't know if yours is one of them. Seek legal counsel.) Which is why you're so wise to be planning for those changes now.

The other fee (not tax) to be concerned about is the probate fee. So you'd generally prefer your estate to pass by beneficiary designation or thru a trust and not go thru the probate process.

As a completely unsolicited aside with the very few facts you've shared here, I think your wife is wise not to relinquish her beneficiary designation until the divorce settlement is complete. It sounds like it might be a large part of your assets so should be factored into the divorce settlement. It would suck on many levels for her if you kicked the bucket before the divorce was final and perhaps the largest asset completely bypassed her.

Wishing you and all your family well as you go thru this.
« Last Edit: November 10, 2018, 01:41:20 AM by MoseyingAlong »

bookguy

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Re: TODs and Wills
« Reply #3 on: November 10, 2018, 06:47:39 AM »
Thank you both for the replies. I am going to get my will done in the next two months, and I'll ask my attorney for advice.

My main question is, since my personal portfolio is technically only mine - it's in my name, I've contributed all the money to it, I opened it after we had separated -  would it make sense to just gift it to my daughter in my will, or is there an advantage of doing a TOD to her on my demise?

I've tried the 50/50 designee on my 401(k), which would be my recommended solution, but it forces me to give 100% to the primary, and then 100% to the secondary if the primary is dead.

Again, thanks for replying. You've both given me something to think about.

yoda34

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Re: TODs and Wills
« Reply #4 on: November 10, 2018, 10:05:46 AM »
If you don't have a trust, which bypasses probate, and are going with a will then TOD will bypass the probate court and reduce any probate fees from that action.

I don't believe, but am not a tax professional or a tax attorney, that it will impact the taxes she has to pay on it. If it's small enough and in an after tax account its possible that it would fit in your life time gift allotment and with a step up basis she would owe very little tax. But always good to get that checked out either way.

One thing to note a TOD will have not impact in case of impairment (i.e. mental issues, Alzheimers, car wreck and you're in a coma, etc). If those types of situations need to be handled they can be handled by a trust or by a separate document outside the will.

ILikeDividends

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Re: TODs and Wills
« Reply #5 on: November 10, 2018, 02:53:39 PM »
. . . since my personal portfolio is technically only mine - it's in my name, I've contributed all the money to it, I opened it after we had separated . . .
Again, best to validate that assumption with the laws of your state.

In my state, there is no such thing as "my money" while you are married.  There is only the community's money; i.e., "our money."  When you are separated, you are still married.  The wife's claim on community property doesn't end until settled by a legal divorce.

It works the other way around as well.  I bought my house years before I ever got married.  The deed and mortgage were only in my name.  But since I was still paying the mortgage out of my paycheck, which clearly was community property, I was co-mingling community property (my paycheck) with sole and separate property (my house), which essentially made my house part of the community's property.

Your assumption might be completely legitimate in some states, or flat out wrong in others.  Logic won't serve you well in marital matters.  You probably already knew that.  But it's more true when ending a marriage than at any other time.

Edit to add: I realize I might have ended this post with a cliff-hanger.  My wife and I had a reasonably amicable divorce.  I engaged a do-it-yourself service to advise us on a marital settlement agreement (MSA), and we ended the marriage legally with a settlement that we both considered fair; i.e., I kept my house.  No lawyers bickering in a courtroom were involved.
« Last Edit: November 10, 2018, 03:18:49 PM by ILikeDividends »

MustacheAndaHalf

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Re: TODs and Wills
« Reply #6 on: November 12, 2018, 04:40:07 AM »
I am going to get my will done in the next two months, and I'll ask my attorney for advice.
In what state do you live?  Without that information, we can't sort out what you could be doing wrong.

I don't think it's a good idea to take legal steps like you're divorced, when you're still married.  Legal papers that are required to have your wife's permission won't have her permission, and that can be a reason to question them in court.

AccidentalMiser

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Re: TODs and Wills
« Reply #7 on: November 12, 2018, 07:41:53 AM »
1. FEDERAL law makes your spouse your primary beneficiary.  http://www.401khelpcenter.com/401k_education/beneficiary_1.html

2. Your spouse MUST sign a waiver to do something different.

3. Your will DOESN'T override the beneficiary arrangement.  You CANNOT supplant federal law with your will.  Your 401k will never see the probate court, it will immediately pass to your primary beneficiary upon your death which is your wife unless she's signed a waiver (which she hasn't.)  You're screwed until your divorce is final if she won't sign.  Nothing in your will will change that.

4. DON'T believe anything I've told you.  I am full of shit as are most of the other people on this forum when it comes to how the law impacts your finances.

5. GO talk to your lawyer and find out FOR SURE what the LAW says and how to protect yourself and your daughter if the unthinkable happens.




bookguy

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Re: TODs and Wills
« Reply #8 on: November 12, 2018, 04:10:57 PM »
Thanks for the additional responses. Obviously, the first thing I need to do is to get a will done (something I should have done twenty years ago), so I can bequeath some things to my daughter - not money, but a few items I know she'll want.

Actually, maybe the first thing I need to do is to get this divorce finalized. After that, I can more readily see what my options are.

Thanks, all, for taking the time to respond. I do appreciate it.