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Advisor Perspective

Advisor Perspective

Estate Planning: Organizing Your Estate Through Account Titling and Beneficiary Designations

Tim Stringer

Principal, CFP®
For Tim, the most rewarding aspect of being a financial advisor is reaching that “aha” moment with clients when there’s mutual recognition of their goals – and then building a road map for achieving them together.

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Very often, clients will complete their estate planning documents with an attorney and find themselves asking, “What now?” They will have an impressively large stack of legal documents but no clear understanding of how these should be applied to their financial assets. This article aims to address the next step in the estate plan: the process of titling accounts and updating beneficiary designations to align with your estate plan.

For more information on basic estate planning documents, please see our previous article “Preparing for Retirement: Estate Planning.”

To begin, it is important to understand how assets can potentially transfer at death. There are four basic ways this can occur:

By Law: The most common example of this is joint account ownership between spouses. If one spouse dies, full ownership of the account legally passes to the surviving spouse.

By Beneficiary Designation: This most frequently applies to retirement accounts such as IRAs, 401(k)s, life insurance, and annuities.

By Trust: For accounts that are titled in the name of a trust, the distribution of assets will follow the terms of the trust. Keep in mind that naming beneficiaries on your accounts generally supersedes any will or trust planning already in place.

By Probate: This is the court-led process of distributing any assets that were not distributed via any of the three previous methods. The common goal is to avoid (or at least minimize) assets in probate. The process can be expensive, time-consuming, subject to public record, and likely allows your executor less flexibility than a non-probate estate.

  • Note: A probate estate is considered testate if the individual had a valid will, while an estate without a valid will is considered intestate. Testate probates will generally follow the terms of the will, while intestate probates will be distributed based on state law.

The next step is to review your investments and determine which of the above options may be appropriate for any given asset. Below is a breakdown of how this is commonly applied to various assets, along with a few key considerations:

Non-Retirement Investment Assets

Examples: Checking account, savings account, taxable brokerage accounts

The Basics: Most non-retirement assets are often titled in the name of a revocable trust. It is important to understand the terms of your trust and ensure the eventual distributions at death align with your goals. Any desired changes to the ultimate distribution of an account would be handled by amending the trust, rather than retitling the account.

Other Considerations:

  • In certain situations, it may make sense to intentionally hold an account outside of the trust. For example, married couples may retain a joint checking account so that the surviving spouse will have ongoing access to the funds at the death of the first spouse.
  • If you do not have a revocable trust, it may make sense to add a Transfer on Death (TOD) beneficiary designation to these accounts. These can also be added as a second layer of protection to a spousal joint account, directing where the funds would go if both spouses were to pass away.

Retirement Assets

Examples: 401(k)s, IRAs, and Roth IRAs

The Basics: These assets are almost exclusively distributed via beneficiary designations. It is beneficial to list two tiers of beneficiaries: primary and contingent (secondary). Spouses are often listed as primary beneficiaries, with children as contingents. Depending on the specifics of your estate plan, it may alternatively make sense to list a trust as a primary or contingent beneficiary.

Other Considerations:

  • Make sure to talk through the potential nuances of your beneficiary plan. Common questions include: If one of my children passes away, do I want my grandchildren to inherit their share? Should grandchildren receive any assets directly when I pass away? What if I want to give something to my children or grandchildren when the first spouse passes away? What if my child does not seem ready to inherit these assets? These are often sensitive, thought-provoking discussions that can be navigated with your JMG advisor.
  • For those with philanthropic intent, pre-tax retirement accounts can be ideal for charitable beneficiaries. The assets can transfer to charity without paying income tax on the distribution, which would likely have been paid by other beneficiaries.

Real Estate

Examples: Primary residence, second homes, investment properties

The Basics: Primary residences are often titled to a revocable trust or held jointly in various forms, such as tenancy by the entirety. The proper registration depends on your state of residency and estate plan. For second homes and investment properties, it is more likely that the properties will be held in a revocable trust. The titling of real estate in non-resident states is an important consideration to avoid probate in a second, non-resident state.

A Few Other Topics to Consider:

  • Even for a well-organized and properly titled estate, the estate administration process can be arduous. Simplification, consolidation, and good record-keeping are actions that can be taken now to alleviate the eventual burden for your executor and trustee.
  • Consider informing your executor and trustee that they have been named in your estate documents. This conversation can help better frame your estate goals and allow the named individual to voice any questions or concerns.
  • Both your financial goals and the composition of your balance sheet will evolve over time. Make sure to revisit your account titling and beneficiary designations at least every few years to ensure they still align with your goals.

Taking the above steps should provide a more organized estate. That said, it may not address other estate issues such as exposure to federal and state estate taxes. Our next article will address more advanced estate planning techniques to help combat these issues. Please feel free to share this article with someone who may find it helpful.

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