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What’s in the title? Advisers say there’s more to estate planning than people realize.
According to Trust & Will, less than half of Americans have estate planning documents, and of those who have a will or trust, 14% never update it, and an additional 13% only update it every 10 years or more. This means more than a quarter of people with existing plans likely have expired beneficiary designations, the company said.
A beneficiary is someone you designate to receive your assets after your death. Advisers say naming beneficiaries and properly naming accounts is one of the most common gaps in estate planning. Ownership is the way assets are owned and managed during your lifetime, jointly with others, individually, or in a trust, etc., and allows you to determine who receives your assets after your death, as well as designated beneficiaries.
Both beneficiary designations and ownership can allow assets to pass outside of probate and wills. Therefore, depending on how ownership of accounts and property is given to, or left to, heirs, statements in estate documents may be invalidated. Ignoring these items could have implications for probate (a potentially lengthy and expensive public process of resolving estates under court supervision), taxes and people who intended to leave assets behind, the advisers said.
“Title is the most overlooked part of ensuring that estate plans are distributed the way people intended,” said Shannon Stevens, managing director and principal of Hightower Signature Wealth. “Ensuring you understand the impact of how you title your assets is extremely important.”
What are the negative effects of improper entitlement or beneficiary designation?
Incorrect or missing beneficiary designations or inappropriate entitlements can result in delayed distributions, misdirection of assets and additional costs, according to the advisers. Here are some examples:
- If you do not update your beneficiaries, your assets may be inherited by someone who was not intended to receive them. For example, a former spouse may inherit assets instead of a current spouse because the beneficiary designation has not been updated to reflect the new marriage.
- Failure to designate a beneficiary will force the assets into probate, delaying distribution, and incurring unnecessary legal fees.
- Minors cannot legally manage assets, so listing a minor as the primary beneficiary will result in a court-appointed guardian. This means delays and administrative costs.
- Real estate such as bank accounts that are not entitled as “joint tenants with rights of survivorship” (JTWROS) or have a designated beneficiary are likely to be probated. This may leave the surviving spouse temporarily unable to access the funds.
- An asset, such as a large investment account titled JTWROS, owned by a second spouse means that the spouse receives that account on behalf of the deceased person’s children who were intended to receive it in the will. “We see this all the time,” said Anthony Fittizzi, wealth strategy executive at Bank of America Private Bank. “It could jump over estate planning.”
Isn’t the will determining who gets what assets?
Advisors say that while a will sets out how assets are to be distributed, assets based solely on a will typically have to go through probate.
“The goal is to name everything possible, and hopefully the will is just an auxiliary part that’s there just in case, an auxiliary role in extreme situations,” Stevens said.
Fittizzi said it’s best to properly title accounts and name beneficiaries for all major assets, such as homes, retirement accounts, and investment accounts, and a will can record anything that’s forgotten or has low value, such as cars or household items you use on a daily basis.
Another reason to make a will is if your heirs have minor children. Minors can inherit assets, but they cannot legally manage large amounts of assets, so they will need a guardian. Fittizzi said this is most effectively done through a will. If not, the court will likely appoint a guardian in an expensive process.
“So wills are important so that you can appoint the right people, people you know and trust,” he said.
How should beneficiaries be titled and designated?
Advisers say the best way to set up ownership of assets and name beneficiaries depends on how you want them to flow.
Start by preparing basic documents such as a will, medical insurance and financial powers of attorney, they said.
If you have more complex assets, such as real estate, business interests, or valuable collections, and you want to avoid probate and keep your assets private, you might also consider a living trust, which is a revocable trust that holds all of the assets you entrust to them, Stevens says. You maintain control of them while you are alive and have specific instructions on how to distribute them outside of probate when you pass.
From there, people can confirm ownership of assets and begin designating beneficiaries, as well as learn how assets will pass upon death (in probate or out of probate) and to whom various ownership interests and beneficiaries will be transferred.
For example, assets in joint tenants with right of survivorship (JTWROS) automatically transfer to co-owners, and assets with designated beneficiaries transfer to designated individuals externally or through probate in each case. However, personally owned assets with no named beneficiaries or assets with joint tenancy rights must be probated and subject to a will.
“Look at the differences in ownership and plan your situation,” Stevens says. “Do you like the results? If not, change it.”
Once that’s done and you have a baseline, she recommends reviewing and updating it after a life event like divorce or marriage, or every one to two years even if there’s no major life event.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
