The Basics: 4 ways to leave what you have to those you love.

When I meet with clients, I always spend some of our first meeting discussing the basics. That way everyone in the room has the same understanding of what we will be discussing and what the words mean. There are four basic ways to leave what you have to those you love. The four ways are: by operation of law, by contract, and by will, and by trust.

Digressing for one moment, the following definitions are general. With every defiinition there is likely a variation on the definition or a nuance that seemingly conflicts. The concepts described below are the starting point of any discussion you may have with your own estate attorney.

By operation of law refers to jointly owned property that automatically goes to the other person named on the account or title. For example, a husband and wife who own a home by tenancy by the entirety or joint tenants are both on the title to the home. When one of them dies, the surviving spouse automatically owns the entire property. The surviving spouse need not take any legal action such as filing a new title or opening probate. The surviving spouse is automatically the full, legal owner of the home. Another example of this type of property is a bank account jointly owned by a husband and wife. When one dies, the other becomes the only owner and can choose to remove the deceased spouse's name by simply showing a death certificate to the bank.

By contract refers to financial accounts and insurance policies where there is a named beneficiary. If you have an IRA or TSP account, when you die the money in it will pass to the beneficiary you listed when you opened the account (see "Check Your Beneficiary Designations" posted October 2, 2008). Another example of this is a life insurance policy, where the owner names who will get the money when the insured dies. If nobody is named then the IRA account, TSP account, or Insurance policy - and so on - goes to the estate of the deceased.

By will encompases property not covered by contract or operation of law. A will is a piece of paper with words on it identifying who you are and what you want done with your personal belongings, bank accounts, property, and everything else you own after you die. A will is also used to designate who you want to take care of your children. It is also used to create trusts that go into existence after you die. Each state has specific requirements establishing what must be included in the will and what must be done to make it valid. Examples of property that pass by will are homes, bank accounts, and cars with only one owner.

A trust is a legal entity that owns property and distributes it according to the wishes of the person that created it. A trust technically falls under the "operation by law" category - but it is an important legal concept and should be specifically explained. Think of a trust as a glass of water. The trust is the drinking glass. The property is the water. The grantor fills the glass with water - to whatever level is desired. The trustee holds the glass and pours out the water pursuant to the grantor's written instructions. The beneficiary gets to drink the poured out water.