Estate planning must-dos

Key takeaways

• Confirm that your accounts are appropriately titled.
• Make certain that your estate plan and beneficiary designations align with your wishes.
• Regularly review your estate plan to make sure it continues to reflect your wishes.

Do you know who your beneficiaries are, and how your assets are titled?

These may seem like simple questions, but if you've spent many years accumulating bank and brokerage accounts, real estate, retirement accounts, annuities, and other assets, it's not uncommon to forget or fail to update this important information.

If you have proper beneficiary designations, your assets can transfer to loved ones quickly and easily upon your death, normally avoiding probate and perhaps even reducing estate taxes. Most people still need a will, but proper beneficiary designations can, in some situations, obviate the need for a more in-depth estate plan or more complex trusts. For people with a larger estate or a more complex situation, however, additional estate and trust planning will likely still be advisable. Of course, speak with your attorney regarding what would be best for you, given your personal situation.

Designating beneficiaries incorrectly, or failing to update them when circumstances change, can have negative, and far-reaching consequences. For example, failing to update the beneficiaries on the retirement account you started 30 years ago may result in the account going to your ex-spouse instead of the 2 children you designated as heirs in your will and estate plan. Ditto for the life insurance policy you bought when you were married to your first spouse, which you now expect to leave to your current spouse, but on which you have forgotten to update the beneficiary.

"Unfortunately, people often don’t realize that certain assets, such as retirement accounts, life insurance policies, and annuities, pass to their beneficiaries by contract and not under the provisions of their will or trust," says Kelly Quinlan, estate planning specialist at Fidelity. Importantly, the beneficiary designations on those assets supersede the terms of a will.

To be safe, review your beneficiary designations on all key accounts and assets at least once a year, or after any major life change, including marriage, divorce, the birth of a child, or the death of a spouse. And if you do have an estate plan, align your account registrations and beneficiary designations with that plan and with your goals.

The basics

Let's start with the basics. There are 2 key account features that can help avoid probate and potentially limit taxes for your heirs.

• Joint ownership
• Naming a "transfer on death" or "payable on death" beneficiary

Below are their pros and cons:

3 types of joint ownership

Joint ownership itself may be structured in different ways, which may affect an estate plan. Each type of joint ownership structure offers an undivided right to the use and enjoyment of the property. However, depending on the specific classification of joint ownership, the ultimate consequences of transfer at a joint owner's death may vary.

There are 3 basic ways to title a joint account, and each of them has distinct implications for estate planning, depending on your situation.

Joint tenancy with rights of survivorship: When one owner dies, property ownership transfers to the surviving owner(s) through the rights of survivorship. Probate may be avoided on the death of the first joint owner of a jointly held account but not necessarily on the death of the surviving joint owner. This is because the asset that was originally jointly held may now be titled solely in the name of the surviving joint owner, hence resulting in a potential probate on the death of the surviving joint owner unless measures are taken to avoid that result.

Tenancy by entirety: This is similar to joint tenancy with rights of survivorship, except that it applies only to married couples.

Tenancy in common: Unlike joint tenancy with rights of survivorship, with tenancy in common, when a joint owner dies, that owner's interest in the property will become part of the deceased owner's estate and will be passed on according to their will. A word of caution: Be careful establishing a tenancy in common account, because it may lead to probate issues.

Pitfall to avoid: transfer on death or payable on death not matching wills

Another simple and easy way to help avoid probate is to name someone as a transfer on death (TOD) beneficiary or a payable on death (POD) beneficiary. The terms are essentially the same but apply to slightly different accounts. A TOD- or POD-titled beneficiary can be named on financial accounts, such as bank savings or checking accounts and investment accounts, vehicle titles, and—in some states—real property.

Despite their simplicity, one major issue with TOD- or POD-titled assets is a lack of awareness or poor coordination with overall estate planning strategies. Some people might not realize that a TOD- or POD-titled asset overrides whatever is stated in a will. If a number of accounts are titled as TOD or POD, a will can be rendered largely ineffective, and assets may not be distributed as intended because the TOD- or POD-titled beneficiary designations don’t align with those established in the will.

Estate taxes may be due on TOD assets depending on, among other things, how the will is drafted. If there are tax issues, relying on TOD or POD beneficiary designations may not be enough, and a more complex estate plan may be needed. As always, please consult your tax advisor.

Pitfall to avoid: beneficiary designations that don't match your will

In general, the assets in any retirement account, life insurance policy, or annuity will pass to the beneficiary named on that asset, regardless of the terms of a will. Therefore, beneficiary designations should be considered an important part of an overall estate plan. Too many people make the mistake of having outdated beneficiaries on some accounts that do not match those in their will, which inevitably creates conflicts among beneficiaries that may become a matter for the courts. "Make sure you understand how all your assets are titled, and the effect of that title," cautions Fred Chang, estate planning specialist at Fidelity. "Then, review and update everything regularly."

"That's why it's so important to coordinate the account titling and the naming of beneficiaries with your overall estate plan to make sure your assets are passed to your heirs the way you intend while helping to reduce estate taxes," notes Quinlan.

In conclusion

Because this aspect of estate planning is very circumstance-driven, each situation must be considered on its own merits. Speak with your attorney regarding what makes sense in light of your personal situation. If your situation is complex, or if you need help understanding the options, seek the advice of an expert.

"Overall, people shouldn't assume too much, and they should understand that there are no panaceas or magic pills for their estate planning needs," Quinlan counsels. "Make sure you get reliable advice from an expert in this area, and be thorough in reviewing your entire estate plan."