Part of comprehensive financial planning is planning how your assets will pass to your heirs once you are gone. Making sure your Will is updated is not the only step to creating an estate plan. Many assets pass outside of your Will, so it is important to fully understand how assets transfer. Retirement accounts, such as 401(k)s and IRAs, transfer via beneficiary designation, while bank accounts or brokerage accounts may pass according to how the assets are titled.
For example, if you have updated your Will, your estate may not be in complete order. If you have a significant portion of your wealth in your IRA, the beneficiary designations on the account will take precedence over any language in your Will regarding who receives your money. If your wealth is in a bank or brokerage account, those too can have beneficiary designations by designating the account as payable on death (POD) or transfer on death (TOD). These designations are often used as an easy way to avoid probate; however, if a large number of accounts are titled as POD or TOD, a Will can be rendered ineffective.
A Will is a legal document that allows you to bequeath property and assets to your loved ones once you pass. While an estate planning attorney is highly recommended for drafting the legal documents, a trusted financial adviser should be addressing your estate plan as a whole, paying attention to how your assets are passing to your beneficiaries, either by designations or titling. For example, if you have divorced, you may need to modify the beneficiary designation on your life insurance policy or an old 401(k) account.
A common issue is how accounts are titled. Many couples have their assets titled jointly, but there are three distinct ways to title the property that may affect your estate plan. Joint tenancy with rights of survivorship is most common, meaning the assets transfer to the surviving owner(s). Joint tenancy by entirety is similar to joint tenancy with rights of survivorship, but applies to only married couples. With tenancy in common, an owner’s interest in an asset will become part of the deceased’s estate to pass on according to his or her Will.
Quite often elderly investors will add their child to their accounts to pay bills or have access to funds in an emergency. Because the child is joint on the account, once the parent dies, those assets transfer directly to the child, potentially cutting off any other heirs, regardless of what the Will dictates. Another scenario is a second marriage, where the surviving spouse inherits the wealth and does not distribute any assets to the decedent’s children. Not only can this cause issues amongst your heirs once you are gone, joint titling can also open you to liability issues. If the joint owner were to be involved in a lawsuit, joint assets are fair game.
Many investors use their Wills to create trusts to pass assets and property to heirs. However if the beneficiary designation on the account or the title of the property does not name the trust, you can lose the trust’s benefits of passing outside of a Will or probate. Furthermore, trust assets pass by the language in the trust documents. For example, take a trust that listed two grandchildren as beneficiaries. However the grantor divided the assets and gave half to one grandchild before grantor died. Without updating the trust language, the remainder of the assets would still be split amongst the two grandchildren, essentially cutting one heir out of half of his inheritance.
Estate planning has many nuances that must be considered, especially if you have out-of-state property, multiple generations of heirs, or income-producing property, to name a few. So often investors will only pay an attorney for their Will, assuming they will handle the asset titling issues themselves. However, life gets in the way and changes don’t get made. Therefore, it can be extremely beneficial to have a trusted financial adviser quarterback your estate plan.
If you have questions regarding how Henssler Financial can oversee your estate plan, our experts will be glad to help: