- Make sure the title of your bank and investment accounts correctly follow your estate plan. Don’t risk inefficient administration of your estate and missed opportunities.
- Ensure beneficiary designations for your retirement plans, IRAs, and life insurance policies are properly structured.
- Beneficiary designations supersede a will and an improper designation could dramatically alter a well-thought-out estate plan.
- A will is just the beginning of an estate plan. The key is understanding how all the pieces work together.
- Focusing on the details will ensure that your assets are properly administered and transferred upon death.
One of the many areas we address in a new client’s onboarding process is reviewing how their accounts are titled and how their beneficiary designations are structured.
REAL WORLD EXAMPLE
Recently we started working with a couple and reviewed their accounts. As is often the case, we discovered that the couple’s previous investment accounts and beneficiary designations were not properly structured based on their net worth, their estate plan, and their desire to administer their estate properly and efficiently in the event that one or both of the spouses died unexpectedly.
We see this situation regularly when we start working with new clients. Many individuals don’t realize that the ramifications of an inappropriate account title or a poorly worded beneficiary designation can dramatically alter a well-thought-out estate plan.
ACCOUNT TITLES MATTER
So what did we find after reviewing the couple’s previous account structure and setting up new accounts for them? The first issue related to their joint investment account, which was titled as “joint tenants with right of survivorship.” There are various ways to title an account and “joint tenants with right of survivorship” may be correct in certain situations. That structure is a very efficient way to transfer ownership and to avoid probate to a surviving account owner when the other joint owner dies.
Sounds like the proper way to title the account, right? Not necessarily.
The problem with this structure is that if your will funds a trust on your death, the assets that pass directly to a right of survivorship to the surviving spouse, may not be eligible for funding of the trust. This can create a problem if you have an estate that’s taxable at the state or federal level or if you want your assets to fund a marital trust.
In our new client’s case, we definitely wanted flexibility with respect to how we would administer their estate. So, we titled their accounts with an appropriate designation to do so.
DESIGNATE CORRECT BENEFICIARIES
The second issue that surfaced pertained to the beneficiary designations on their IRAs, their retirement plans, and their life insurance policies. The spouse was listed as the primary beneficiary, which is generally the case, and the couple’s two young children (under age 18), were listed as contingent beneficiaries, which is generally NOT the case.
Just as with the right of survivorship designation, the beneficiary designation supersedes a will. If both spouses pass away, the assets transfer to the children and not to the children’s trust, that would be created under their will upon the parent’s death. The problem here is that the children’s trust provided specific direction about the management of the trust’s assets as well as about the type and timing of the distributions. These instructions were substantially different from what would have resulted had the assets been inherited directly by the children.
As you can see, simply preparing a will does not ensure that your estate plan and desires will be followed properly. As with so many things in life, attention to the details is what makes the difference. Understanding how the many estate planning pieces work together is important for both clients and their advisors.
At Soundmark, we develop an understanding of our client’s financial situation and goals and we review their estate plan to ensure that is it managed correctly upon an unfortunate death in the family.
In my next post, I will discuss the changes we recommended in this particular couple’s will and how we helped them set up the appropriate trusts for their growing net worth.
If you or someone close to you has estate planning concerns, please feel free to contact us.
Todd Flynn, CPA, CFP ® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.