Taking Care of Mom and Dad: What a Will Doesn't Control

Property that passes under the terms of your parents' will is called probate property, referring to the probate process that executes the terms of their will. There are a number of assets that pass by the operation of law or contract that are not controlled by their will.

Proceeds from any life insurance policy go directly to the beneficiary named on the policy, without passing through your parents' will. The person who receives the proceeds does not have to pay taxes on them. But, if your parents own and control the life insurance policy (having the ability to borrow on the policy or change the beneficiary is considered control), the proceeds of the policy are part of their estate and may be subject to various federal and local taxes.

Proceeds from retirement plans, such as IRAs, 401(k) plans, pension and profit-sharing plans, etc., also pass directly to named beneficiaries. However, like insurance proceeds, these assets are subject to estate tax and federal income tax. There's also an additional 15 percent tax if your parents have a large amount of money (in 2002, the amount was $1 million) in the plan.

Assets owned by your parents and someone else, such as houses, bank accounts and brokerage accounts, can be held in joint tenancy with right of survivorship (JTWROS) accounts. This means that if one owner dies, the other has legal rights to the assets. If a spouse is the surviving person, usually half of the value of the asset is taxed in the dead person's estate. If it's someone else, such as a child, the IRS will look to who actually paid for the assets to decide who will pay.

For you, as a child, owning something in a JTWROS trust or account with your parents is not usually a successful way to avoid taxes. However, it can establish your claim to a piece of family property. And, more commonly, it may become necessary if there are questions about your parents' competency while they are living.