You’ve worked hard to accumulate assets. Your intent is to leave a legacy – whether that legacy is with loved ones or with an entity (charitable organization, alma mater, etc.). While it’s difficult to control what happens after you die, you can take action to make sure your wishes are known through estate planning.
Most financial accounts request you name a beneficiary. This information will override what is in your estate plan. For example, your estate plan may state your intention to split ALL your assets evenly between two children. However, if you wrote a name in the beneficiary section of your financial account, those assets will go directly to your beneficiary. Assets without beneficiary designations will roll into your estate which would then be distributed according to your estate plan – of course, after taxes and debts have been paid.
“So why do I need an estate plan if my financial accounts designate beneficiaries?”
Take a look at all your assets – your belongings. Not everything you own is a financial account. You may have a house, vehicle, jewelry, household goods, artwork, tools, etc. Distribution of these items would be addressed in your estate plan.
Another reason for an estate plan is if you have dependents, whether or not they qualify as a dependent on your taxes. Dependents could include minor children, special needs adult children, elderly loved one or even your beloved pet. How will your dependents be taken care of after you die? Your estate plan will address this issue.
If you are part of a modern family, meaning second marriage with stepchildren, you need an estate plan to specify your wishes. Pay attention to the term “per stirpes” when specifying beneficiaries. Some financial institutions assume your assets will pass “per stirpes” or equally among the branches of family. For example, if your wife is your primary beneficiary on a financial account and she passes away the same time as you do. With “per stirpes,” assets from that financial account could pass to her children from a previous marriage (i.e., your stepchildren) if you have no children.
Most families are complex with many personalities – another reason for an estate plan. Let’s say you are not confident your daughter’s marriage will last. You may want to specify her inheritance is held in a trust to avoid it being comingled with her martial assets.
“Wouldn’t it be easier if all financial assets roll into my estate for easier and equitable distribution?”
In order to answer that question, you’ll need to consider tax consequences and ease of access to money. For money needed to pay regular bills, you may consider having “payable on death” beneficiary for your checking account – especially, if you have loved ones living in your home.
An executor will be identified to handle the administration of your estate. An executor is named in estate planning documents or if there is no document the court will appoint a person. This person will handle all administration of your estate, including notifying and paying all outstanding debt.
For retirement assets, name your beneficiaries to avoid these assets from going through the sometimes lengthy probate process and being taxed. If you name your estate as the beneficiary on retirement assets, then the full amount rolls into your estate and is taxed. If you name a beneficiary, that person will receive the money directly avoiding the probate process. Additionally, your beneficiary can stretch out distributions and taxes for traditional retirement accounts.
“It sounds too complicated. What if I did nothing?”
If you decide to do nothing, your estate may be tied up in probate for a lengthy time period. It may also cause much disagreement among beneficiaries.
Make it uncomplicated by hiring professionals – an estate planning attorney and Certified Financial Planner™ professional (CFP®). Your estate planning attorney will develop all legal documents according to state laws. Most estate planning attorneys will charge a flat fee for a simple estate.
Your CFP® will review your financial accounts for beneficiary designation and ease of access to money after you pass away, as well as discuss tax consequences. Depending on your relationship with your CFP® you will be charged an hourly fee, flat fee or no fee.
Also, it’s a good idea to check your beneficiary designations after major life transitions – marriage, job change, divorce, and death of loved ones. To make it easier, add it to your to-do list when you gather your tax information annually. In this way, you won’t forget this task.
While you can’t control from the grave, you can establish documents to describe your intent. It’s not a topic most people enjoy discussing but it is necessary to avoid unnecessary drama after your death. Ask anyone who had to deal with an unexpected death and assets being tied up in probate.
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ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter and financial advisor. Her services include spending plan, financial plan, divorce financial review, life strategy and professional progression. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me’.”