First, let me say that the Death Tax no longer affects the vast majority of Americans. You probably do not have to worry about this. I wish you did, because that would mean you were doing pretty well in life. First world problems!
On July 1, 2013, an extensive amendment to Tennessee Trust Law came into effect. The length of the amendment was about fifty pages. Although practitioners (including myself) are still (even 8 months later) wrapping their heads around the changes, a brief perusal of the amendment reveals three essential themes which permeate the new law:
- Creditor Protection for Trust Beneficiaries: Trusts are better than ever at protecting the assets from the beneficiary’s creditors, divorce, and lawsuits.
- Protection for Trustees: Trustees have significantly more discretion and significantly less exposure to potential liability under the new law.
- Directed Trusts: There are more options and detailed rules on “Directed Trusts,” which are Trusts where you name a third party to advise and direct the trustee on a particular issue, such as an investment advisor, or trust distribution committee.
With respect to protection from creditors, arguably pre-July 1 Tennessee law had very good protection for beneficiaries. In my estimation, the law has gone from very good protection from creditors to all but iron clad.
You may know that the death benefit of a life insurance policy is exempt from the claims of creditors when paid to an insolvent estate where the beneficiaries are the spouse and/or children of the deceased. See T.C.A. § 56-7-201. You may also know that the cash surrender values of insurance policies and annuities are protected from creditors if the beneficiaries of the policies are the spouse and/or children of the insured or annuitant. See T.C.A. § 56-7-203.
What you probably do not know is that benefits received from health, accident or disability insurance policies are exempt from claims of creditors both during life and following the insured’s death. See T.C.A. § 26-2-110.
How better to begin my blog than to discuss the basics of how assets pass at death?
The way assets pass at death can be swept into four categories:
- Survivorship. Assets held as Joint Tenants with Rights of Survivorship (known as Tenancy by the Entirety when the property owners are husband and wife) pass to the survivor automatically. Common assets held as survivorship property include a home owned by spouses and bank accounts.
- Beneficiary Designation. Assets with a beneficiary designation pass upon the death of the owner to the named beneficiary. This includes life insurance, annuities, certificates of deposit, retirement accounts (IRAs, 401(k)’s, 403(b)’s, and etc.) and any number of other types of assets. Sometimes beneficiary designations are called “TOD” or “POD.”
- Trust. This is ripe for the next blog entry and I do not wish to steal my own thunder, but basically a trust is a vehicle for managing assets. The Trustee is the “manager.” The beneficiary is the person who gets the benefit of the trust assets. Anyway, assets held in trust pass according to the terms of the trust.
- Sole name. The fourth and final way that assets pass at death are assets that are in your sole name, without a beneficiary designation, and without a joint owner (no survivorship aspect). These are the only assets that pass through probate and controlled by a Will. One caveat: assets paid by beneficiary designation to your estate (or without a valid beneficiary designation) or your executor or to a trustee named in your Will will be controlled by your Will.
Did you notice that there are not that many types of assets that pass through your Will?
More to come. Stay tuned.