Just because you completed your last will and testament and revocable living trust does not mean the work on your estate plan is completely finished. In addition to having signed documents, you need to make sure that your assets are titled and any related beneficiary designations are updated in accordance with your plan.
Forget to take that last step and you may end up leaving assets inadvertently to an ex-spouse or former friend. Plus, you'll want to be sure your intentions are well communicated to your loved ones.
What to do? Here are tips and a checklist to help you make sure your estate plan can be carried out the way you planned.
Start by updating beneficiary designations
"One of the biggest mistakes people make at the end of the estate planning process is not updating their beneficiary designations," says Catherine Neijstrom, Vice President, Financial & Trust Planning Lead. "Many people are not aware that beneficiary designations supersede will and trust provisions, making updating beneficiary designations a critical step in determining what happens to related assets when you die."
A beneficiary designation is a form filed directly with the custodian of a retirement or other investment or bank account, or with a life insurance company with respect to a life insurance policy. Beneficiary designations with respect to non-retirement investment accounts are known as transfer on death ("TOD") designations, and beneficiary designations with respect to bank accounts are known as payable on death ("POD") designations. A beneficiary designation allows ownership of the account to be transferred to the beneficiary or beneficiaries listed in the beneficiary designation upon the account owner's death without the account having to pass through probate, thus avoiding probate-related expense and delay. Note that particularly in the case of retirement assets, how beneficiary designations are completed may have significant tax implications. Accordingly, careful consideration of how to complete beneficiary designations is important, in consultation with your estate planning attorney.
Many times beneficiary designations are not set up properly, resulting in the distribution of related assets differently than intended. For example, your will or revocable trust may have provisions leaving your assets to a trust for your beneficiaries that gives you the ability to control the ultimate distribution of the assets upon your death. If the transfer on death designation on your brokerage account names the beneficiaries directly, however, instead of naming the trust, the TOD designation would give the beneficiaries unfettered access to the brokerage account immediately, instead of the account being held for them in further trust. On the other hand, if you've named a trust in a beneficiary designation for retirement benefits and the trust hasn't been drafted to consider income tax treatment of retirement benefits, unintended tax consequences can result. Accordingly, careful consideration of how to complete each beneficiary designation in consultation with your estate planning attorney is key.
Tip: Some retirement plans may automatically designate your spouse as the beneficiary unless you name another beneficiary and your spouse consents to the designation in writing. Check with your plan's governing documents to understand its beneficiary designation policy.
A checklist for you
As you put the finishing touches on your estate plan, here are some important steps to consider:
- Carefully review the detailed letters of instruction from your estate planning attorney and work with your financial advisor and attorney to take action as needed, for example by retitling assets and updating beneficiary designations on retirement assets, insurance policies, and other accounts.
- Create a list of your digital assets and name a successor to handle them. Read Viewpoints on Fidelity.com: Estate planning for the digital era
- Consider writing a memo to direct specific items of "Tangible Personal Property" (such as furnishings, jewelry, automobiles, and collectibles) to certain individuals, if this is allowed in your state and part of your will or trust.
- Consider drafting and regularly updating a letter of instruction to your children and/or fiduciaries. This letter should include an inventory of assets and a list containing names, addresses, and phone numbers of your various advisors (for example, your attorney, accountant, financial professional, or banker).
Tip: Many families today use secure virtual safes to store copies of important documents and other information, such as passwords, financial statements, and estate planning documents. In addition, a financial advisor may be able to assist with:
- Re-registrations of financial assets
- Mapping certain financial assets to your overall financial plan
- Consolidating assets from other financial services firms (if necessary) with the goal of simplifying recordkeeping and administration
- Connecting you to additional resources or expertise such as tax planning and charitable giving
Fund trusts by retitling assets
There are many types of trusts to consider, each designed to help achieve a specific goal. An estate planning professional can help you determine which type of trust is appropriate for you. It may be that more than one type of trust could be useful to you. A trust, whether revocable or irrevocable, is a legal arrangement whereby property is transferred to a trustee for the benefit of one or more beneficiaries.
A critical element of estate planning, often overlooked, is that in order to fund a trust and avoid probate, you, known as "the grantor," would need to transfer assets to the trust by retitling assets. If your estate plan calls for converting your individual account into a trust account, that does not happen automatically.
For example, if your estate plan includes funding a revocable living trust, you need to title assets in the trust's name in order to fund it. The assets that typically are owned by a revocable trust can include:
- Taxable brokerage accounts
- Bank accounts and certificates of deposit
- US savings bonds
- Investment real estate
- Second homes (in some states, attorneys advise the client to title their primary residence in their trust as well; it generally depends on probate, homestead provisions, and trust statutes, by state)
- Business interests
- Limited liability company (LLC) and partnership interests
If a trust is not properly funded, those assets pass via the will through probate, causing avoidable expense and delay, and becoming a public matter. So if you decide to create a trust, make sure to work with a lawyer and financial advisor to get the titling of the assets correctly implemented.
Tip: Read Viewpoints on Fidelity.com: Is a trust right for you?
What happens to your assets after you die?
Here's a breakdown by different types of assets and accounts.
| Type of ownership | Examples of commonly held assets | What happens after someone dies |
|---|---|---|
| Account titled in decedent's name alone with no beneficiary designation attached, or with beneficiary designation naming estate |
|
Accounts in the decedent's name will pass through decedent's probate estate via will . |
| Account titled in decedent's name alone with beneficiary designation attached, including payable on death ("POD") or transfer on death ("TOD") designation, not payable to estate |
|
Upon death, assets are transferred directly to the named beneficiary without going through probate. |
| Joint tenants with rights of survivorship/joint tenants by the entirety |
|
Upon death, the surviving joint tenant becomes the owner of the entire asset without going through probate. |
| Joint tenants-in-common* |
|
Upon death, the deceased joint owner's portion of the account does not automatically pass to the surviving joint tenant and instead passes through the decedent's probate estate via will. |
| Business entity interest |
|
If not owned by a trust, the decedent's ownership interest in a business may pass through the decedent's probate estate via will. |
| Revocable trust |
|
Assets in the decedent's revocable trust's name are part of the decedent's taxable estate and at the decedent's death the named co-trustee or successor trustee takes over to administer the assets in trust. |
| Irrevocable trust |
|
Assets are likely already outside of the grantor's estate and the trustee is responsible for administering the assets in the trust according to the trust's terms. |
Is it time to update your estate plan?
Many estate plans no longer meet their creators' original intent due to a lack of routine updating. Death, birth, marriage, divorce, changing financial circumstances, and purchasing property located in another state are some of the many reasons estate plans become outdated.
"As you update your estate plan, it's critical to get your beneficiary designations right, correctly title your assets, and remember to fund a trust, if applicable," says Neijstrom.