As we kick off a new year, many of us are focused on keeping our resolutions and achieving our goals for a happy and healthy life. If one of your resolutions was to get your financial life in order, you’re not alone. With interest rates rising and inflation at a 40-year high, making smart decisions about money this year is top of mind for many people.
An important part of managing your finances is making sure your estate plan is solid and your beneficiaries are set up properly. Caring.com, in conjunction with YouGov, conducts an annual study to determine who is engaging in estate planning and identifies the reasons why or why not. Interestingly, the pandemic has created a sense of urgency around estate planning among the youngest group of participants. For those ages 18-34, the number of people who have estate plans is 24%, up from 16% in 2020. For people ages 35-54, the number with estate plans is 27%, the same number as in 2020, and those ages 55+ are 45%, down from 48% in 2020.
If you’re wondering where to start with your estate plan, or you’ve put off reviewing and revising your plan, here are some recommendations to consider. These tips will make a significant impact on your peace of mind and your desired estate planning outcomes.
Estate Planning Documents
The best thing to do is to establish formal estate planning documents that include a will, power of attorney, and health care directive. In many cases, a trust would be a beneficial addition to estate plan documents. Even if you don’t think you have enough assets for a trust, there are other important reasons to create one. Trusts avoid the probate process which is helpful in states with complicated estate settlement processes like California, or for clients who own properties in multiple states. Or, if you have younger children or family members with special needs, trusts can be critical to ensure that the people you want to care for your children are designated and your desires for how your children receive your wealth are addressed. For those with children or family members with special needs, a trust can protect your loved ones’ ability to qualify for needs-based government benefits.
It may be tempting to use an online tool to create these documents due to cost or convenience, but there are many risks to this. A qualified estate planning attorney will be well worth the fees. There are some attorneys who do “a la carte” work, charging you only for the documents you need, rather than one flat rate. Your financial advisor likely has someone they can recommend based on your needs.
Not all of our assets can or should be addressed in a will. Assets such as individual retirement accounts (IRAs) and life insurance allow for beneficiary designations, and while this may seem straightforward, here’s what to consider regarding these designations.
Establishing beneficiary designations on IRAs, company retirement plans, life insurance plans, and annuities for many people can become a “set it and forget it” strategy. Once they’ve done it, they don’t feel that they need to look at it again. However, many of our estate planning attorney partners tell us they often see situations in which someone has died, and their beneficiary designations didn’t reflect their wishes or family situation. Life can bring many changes after an original designation is made. People may have married or divorced, a spouse may have died, children could become estranged, or the owner of an account may now feel more charitably inclined than in the past. All of these are reasons to review the beneficiary designations on all your accounts that require this information.
Additionally, as one’s wealth grows, some estate tax planning strategies that use appropriate beneficiary designations may optimize the wealth passed to future generations or charities.
Most people only consider their primary beneficiary designation. But it’s also important to consider contingent beneficiaries and other designations like “per stirpes.” Let’s take these one at a time.
- Contingent beneficiary. A contingent beneficiary receives the asset only if there are no living primary beneficiaries. Most people will use contingent beneficiaries to ensure their children will receive the asset if their spouse dies before them. For instance, a beneficiary designation for Susan Smith might look like this: “Joe Smith, spouse, as 100% primary beneficiary and David, John, and Amy, children, as contingent beneficiaries to share equally.”
- Per stirpes. One can further define beneficiary designations by using a per stirpes clause. Let’s assume that Susan is now a widow, and her children are now her beneficiaries. Using a per stirpes designation allows for the descendants of her children to inherit if any of Susan’s children die before her. Let’s assume that David has two children, John has one child, and Amy does not have children. Susan has named her children to share equally when she dies. If David dies before Susan, his one-third share would be divided equally between his two children. And if John dies before Susan, his child would receive his full one-third share.
- Per capita. Another way of dividing assets among generations is per capita. With the same family facts as above, let’s assume that John and David have predeceased Susan. When Susan passes, Amy (Susan’s sole surviving child) will receive the entire share, and David’s two children and John’s child will not receive anything under the per capita designation.
Because these designations are complex, it is important to consult an estate planning attorney so that they are written clearly to avoid confusion and possible court involvement when the account owner dies.
Updating Account Titles
If you were confused about beneficiary designations, then account titles may make your eyes roll back in your head. Account titling can be complex, varies by state, and should only be coordinated with the guidance of an estate planning attorney. This discussion is for those non-retirement assets such as individual brokerage accounts and real estate. For example, in Washington state, which is a community property state, property is held (and titled) in four primary ways.
- Joint tenancy allows for the right of survivorship. If one of the joint tenants dies, his or her interest in the asset passes to the surviving owner without having to go through the legal probate process. This is commonly used for married couples.
- Tenancy in common is generally used for unmarried couples. Each owner has rights to the asset during his or her life. Each owner can designate who is to receive his or her share at death. It does not have to be the surviving owner.
- Community property specifies that both spouses have an equal right to the property during the marriage. When the first owner dies, the survivor automatically receives half of the asset and the other half passes to lawful heirs, which may or may not include the surviving spouse.
- Transfer on death allows the sole owner of a brokerage account or real estate to register that asset as transfer on death and to name beneficiaries. This avoids the sometimes lengthy and expensive probate process.
Make an appointment with your financial planner and estate planning attorney to update your beneficiary designations and account titles. You can have peace of mind that your estate wishes will be fulfilled.