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Estate Planning Strategies by Beneficiary

After you’ve considered the people who will help carry out your wishes and settle your estate, the next step is to list your beneficiaries and understand any specific options you have for each of them.

Think about the people in your life

Beneficiary is the legal term for someone who will inherit assets from you, regardless of whether the asset has a beneficiary designation on it or not. Another commonly used term is heir, although in legal terms, this refers to the family members who inherit under state law from those who pass away without a will.

Of course, deciding what to do with your assets is a very personal decision. It may be helpful to make a list of your beneficiaries, to make sure you have included everyone you wish to include and to help you divide your assets among them.

As you develop your estate plan, you’ll want to keep in mind how to:

  • Try to minimize taxes.
  • Provide for your spouse and other beneficiaries.
  • Consider giving to charity.
  • Ensure your affairs are managed in the event of your incapacity.

You should work closely with your attorney or tax advisor to assess your options.

Giving now

When giving now, remember:

  • Life expectancy can be difficult to estimate; make sure you’ll have enough to live on for yourself and your dependents.
  • Gifts to family and friends aren’t tax deductible.

You may want to consider options you can use during your lifetime to help children or other family members while reducing federal gift and estate taxes:

  • Use the annual gift tax exemption. You may be able to reduce the amount of your estate substantially if you take advantage of your ability to give up to a certain limit each year to as many individuals as you choose. There is also a lifetime gift tax exemption that may apply. For the latest on the federal estate and gift tax exemption, see A tax smart way to gift to heirs in Fidelity Insights.
  • Pay directly for education and medical expenses. You can pay tuition (but not room and board) for a grandchild or any special student in your life, without incurring gift tax or generation-skipping transfer tax, by writing a check directly to the institution. The same rule applies for medical expenses. Such payments are not considered taxable and do not count against your annual or lifetime gift tax exclusion amounts.
  • If your goal is to fund a future college education for a child or grandchild, consider using your annual gift tax exemption to establish a state-sponsored 529 account or Uniform Gifts to Minors Act (UGMA) account or Uniform Transfers to Minors Act (UTMA) account. 529 plans have a unique feature: up to five years’ worth of the annual gift tax exclusion amount may be added to the account in the first year, if you agree not to make another gift to the same person in the following four years and with certain other exclusions. UGMAs and UTMAs can also be used for other types of expenses, in addition to education.

Learn about transferring assets to beneficiaries

For each person in your life to whom you’d like to leave assets, find out the unique rules and options for transferring assets to them and how to avoid common mistakes:

Your spouse
Whether or not your assets are owned jointly with your spouse, there are special provisions for many types of assets that allow for a faster, more direct transfer.

Your children
Minor children and children from a previous marriage may require special consideration.

Your grandchildren
A solid estate plan accounts for each grandchild individually and their status as an adult or minor.

Other family and friends
Assets left to relatives other than spouses and children can be more likely to go through probate—learn about your options.

Charity
There may be more options than you think that will benefit both your tax strategy and your favorite causes.

Consider insurance

You may or may not have life insurance now; if not, it’s a good time to consider how it may help in your estate plan. Life insurance can offer death benefits to help with expenses, and it can also be used for wealth transfer.

Death benefits can help your survivors deal with final expenses and maintain their standards of living, even for years to come, if you plan for your coverage to do so. Insurance can also be used to ensure that a business or plans such as a college education stay on track.

Term coverage is often used as a simple, inexpensive way to provide these kinds of protection for family and other dependents for a specified term or period of time. Permanent coverage can be used in the same way, as well as for transferring wealth. Estate planning strategies by asset provides more details on permanent life insurance for wealth transfer in the estate planning process.

Another insurance consideration is long term care (LTC) insurance. Should you become incapacitated unexpectedly, LTC insurance will be a source of funds to help with your care, giving you more options and making things easier for your family. For estate planning purposes, it could prevent your cost of living and medical expenses from having a significant impact on what you leave behind.

Regardless of the types of insurance you have, it is crucial to keep the beneficiaries named for each policy up to date.

Next step

Estate planning strategies by asset
Once you have considered your options for each beneficiary, learn about your options for different types of assets.

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beneficiary

individual who receives the benefit from an estate, trust, retirement account, life insurance policy, or account with a transfer on death (TOD) designation

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heir

individual who is eligible to inherit the assets of someone who died without a will; also commonly used to describe any beneficiary or inheritor (also known as heir at law)

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generation-skipping transfer (GST) tax

excise tax levied in addition to any gift or estate tax, imposed on the transfer of property to a beneficiary other than a spouse who is two or more generations younger than the donor

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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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529 plan

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

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long term care (LTC) insurance

insurance that covers the needs of disabled persons not generally covered by health insurance, Medicare, or Medicaid

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.

Guarantees are subject to the claims-paying ability of the issuing insurance company.

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