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Other Family Members & Friends

For friends and relatives outside the legally recognized, immediate family, a carefully prepared, up-to-date estate plan is even more essential.

Friends and relatives other than spouses, children, and grandchildren aren’t usually given special consideration in estate planning matters. There may be people in your life you consider family but who may not be recognized legally as relatives. Each state has rules of succession laws which help determine who gets assets if there is no will or if the named beneficiaries aren’t sufficiently clear, but these rules don’t usually provide for individuals beyond the deceased’s immediate, legally recognized family.

You’ll still want to plan carefully to minimize estate tax on assets passing to these beneficiaries. You may also consider giving to these beneficiaries individually during your lifetime to take advantage of any annual gift tax exclusion and your lifetime gift tax exclusion. You can also contribute to their education or medical care without incurring any gift tax, by paying for these expenses directly.

Additionally, if paying for education is a concern for any of these beneficiaries, you may already have placed assets in a 529 Plan, Uniform Gifts to Minors Act (UGMA) account, or Uniform Transfers to Minors Act (UTMA) account. If not, doing so during your lifetime may be a strategic way to reduce the value of your taxable estate while working toward education savings goals.

If you have a 529 plan, you generally maintain control of the account until the money is withdrawn. Therefore, part of your estate planning might be to update the successor designation, which stipulates who will take over management of the account if you pass away.

And, as always, ensure your beneficiaries are up to date on other assets that have provisions for naming them, including investment and bank accounts with transfer on death (TOD) designations. This is especially important for beneficiaries outside your immediate family, as assets don’t usually go to such beneficiaries by default or outside of the probate process if they are not named properly.

Trusts

Trusts can be especially beneficial for minor children, including nieces, nephews, and the children or grandchildren of close friends that you wish to designate as beneficiaries, as trusts provide the means for more control of the assets, even after your death. By setting up a trust, you can communicate how you want the money you leave to a minor beneficiary to be managed, the circumstances under which it can be distributed, and when it should be withheld. You can also determine if the child will be able to control the money at a certain age as either a co-trustee or the sole trustee.

A trust can also be an effective tool for transferring assets to adults, while potentially reducing estate taxes and allowing your influence on the assets even after you have passed away. A simple revocable trust or irrevocable trust may suit your needs, or you may require a more specialized trust depending on the asset or your circumstances.

Retirement accounts

Only spouses have the option of rolling retirement plan assets into their own IRAs; other beneficiaries will generally be required to begin taking minimum required distributions (MRDs) soon after your death based on their age—and to pay the associated income taxes. Additionally, your retirement plan assets will be included in the value of your estate for federal estate taxes with no corresponding deduction, potentially increasing your estate tax liability.

Although IRAs have no special provisions for naming non-spouse beneficiaries, you may name other individuals. You may also specify contingent beneficiaries, who will inherit the assets should a primary beneficiary pass away first.

As always, make sure your beneficiary designations are up to date; with missing or incorrect designations, your assets may not be distributed as you intend or your beneficiaries may have to wait to take ownership and incur costs due to probate and income taxes.

To learn about the options non-spouse beneficiaries will have when inheriting an IRA, see If you are a non-spouse IRA beneficiary in Fidelity Viewpoints®.

The rules for 401(k)s and other qualified retirement plans are similar to those for IRAs. If you are married and you want to designate beneficiaries other than your spouse, you may need written consent from your spouse.

Otherwise, such plans follow roughly the same guidelines for what is taxable, but other features will vary from plan to plan. Contact the plan’s administrator for specific rules governing your plan.

Next step

Estate planning strategies by asset
Consider what kinds of assets you’ll leave to beneficiaries and the top estate planning concerns for each situation.

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529 plan

state- or state-agency-sponsored college savings plan that is flexible and offers tax-deferred growth

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Uniform Gifts to Minors Act (UGMA)

state law that allows adults to contribute to a custodial account in the name of a minor beneficiary without having to establish a trust or name a legal guardian; such funds are irrevocable gifts to the minor and may only be used for the benefit of the minor

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Uniform Transfers to Minors Act (UTMA)

state law that extends the coverage of the Uniform Gifts to Minors Act (UGMA) so that transfers to a custodial account in the name of the minor beneficiary may be simplified; such funds are irrevocable gifts to the minor and may only be used for the benefit of the minor

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transfer on death (TOD)

a provision of a brokerage account that allows the account’s assets to pass directly to an intended beneficiary; the equivalent of a beneficiary designation

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revocable trust

trust that gives one the ability to pass trust assets to beneficiaries without the delay or expense of probate, but over which the ability to change or terminate during one's lifetime is retained (also known as living trust)

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irrevocable trust

trust that cannot be changed once it is created (during the grantor's lifetime or at his or her death)

Questions?

The tax information and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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