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Why order matters in Estate Planning

distribution, Christian Aid Minstries

Everyone can and should do estate planning, whether your estate is modest or complex. Estate planning requires taking control, making informed decisions and then implementing those decisions. One of the ways that you can make informed decisions is by learning more about the distribution process of your estate.

The distribution of your estate property to your heirs will happen by one of three processes. These three processes are: Distribution by Operation of Law, Testate Distribution, and Intestate Distribution. One question that often arises during estate planning is what the meaning is of Operation of Law distributions. These are terms used by many estate planners and attorneys to describe specific sectors of estate planning.

Estate settlement is a facts-based process and one fact that is often misunderstood is that Order of Operation determines the distribution of an estate’s assets. Having the Order of Operations different from what you are intending can result in the distribution of your assets occurring in a manner that was not your intent.

Suppose for instance that your unmarried Aunt Susan had made you, her oldest niece, the personal representative of her Last Will & Testament. The Will states that she intends for fifty percent of her assets to be equally distributed to her nieces and nephews with the remainder to be given to a local charity. During her lifetime she has also named her youngest brother John as the sole beneficiary on her bank account. In the latter years of her life she sold her home and held all of her assets in this bank account. Will your Aunt Susan’s assets be distributed at her death in accordance with her stated wishes?

Order of Operation will dictate that Operation of Law obligations be satisfied before the next step, Testate Distribution, can be applied. In this instance, your Aunt Susan had a valid contract with the bank to give all of the assets in her bank account to Uncle John. Because all of her assets have been distributed by Operation of Law, the next step, Testate Distribution will not apply. In this instance you would find yourself to be the representative of an estate with no assets to distribute and quite possibly some difficult family dynamics to negotiate.

Unfortunately, situations like this occur far too often and many times because the Order of Operations is misunderstood or misapplied. Let’s take a brief look at the Order of Operations for estate distributions.

  1. Lifetime Gifts. Lifetime gifts are distributions that you have made during your lifetime and are not considered to be part of your estate.
  2. Operation of Law. Operation of Law distributions take place because of legally enacted deeds or contracts that you have made during your lifetime. These types of distributions often come in the form of beneficiary designations on bank accounts, IRAs, Annuities, and Trusts. They can also take place through Survivorship and Transfer on Death Deeds.
  3. Testate Distribution. Testate distributions happen because of directives that you have included in your Last Will and Testament.
  4. Intestate Distribution. Intestate Distributions are distributions made by State directives and come into effect if an individual dies without any legal documents guiding the distribution of his estate.

Understanding the correct Order of Operations is important because if your assets have someone’s name on them as beneficiary, partial or secondary owner, or someone has a binding contract on assets named in the will, these assets pass by operation of law, superseding the will which has no power or control over them.

For these reasons, it is important that you seek legal counsel to not only write your will or trust but to also coordinate what you own with how you own it so that it passes to those people and ministries whom you have chosen. Are your plans in order? Do they follow the order that you are intending? Why not take the time to review them or have a qualified adviser review them for you?

—Steve Yoder, CAM Foundation staff member


 

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