After reading our Masking Tape Inheritance blog, you finally did it! You made the time to visit your estate planning attorney (with your spouse) to go through the process of updating your estate plan.
You’ve thought through the uncomfortable scenario of who would get your assets when you die. You decided who would help you make financial and health care decisions as you age. You even decided in what instances you want to be taken off life-support.
You are exhausted and proud that you’ve finally checked estate planning off your “to-do” list.
Not so fast. There is still work to be done.
- FUNDING INSTRUCTIONS: Did your attorney provide funding instructions for your Trust, and direct how to update the beneficiary designations of your retirement accounts and life insurance policies?
CAUTION: If your attorney did not provide specific instruction on how to update titles and beneficiaries, be sure to ask!
- KNOW WHAT YOU SIGN: Ask yourself if you understand what your new Trust actually says, e.g. At what ages and for what reasons can your heirs access their inheritance? Will your Trust continue indefinitely or will it terminate at some point? Who will be managing the Trust and sub Trusts?
- BENEFICIARY DESIGNATIONS: Do you have a clear understanding of how each of your assets will pass? Now that you’ve done all of that work, you probably assume all of your assets will pass via your Will or Trust after your death. However, retirement accounts and life insurance proceeds do NOT pass via Trust or Will, but instead through the beneficiary designation on file with your brokerage firm/insurance company. What this means is that you must contact the company that holds each retirement account and life insurance policy and request the paperwork to update the beneficiary designations. It is very important to discuss with your estate planning attorney how beneficiary designations should be written for each account. Attorneys may recommend:
- Naming your spouse (for married couples a spouse is frequently named first for retirement accounts).
- Naming your Trust as the primary beneficiary of a retirement account means that the account must follow the terms of the Trust after your death. However, naming your Trust as primary beneficiary may have unintended consequences, such as losing the ability for your heirs to “stretch” their required minimum distributions longer than 5 years. Naming the Trust as a beneficiary of life insurance policies means that the insurance proceeds will also become a part of the Trust.
- Directly naming heirs – this allows your heirs to maintain the tax benefits mentioned above; but then loses the protection created by your Trust.
- A charity – In some cases it makes sense to name a charity directly as a beneficiary of your account, although this decision is typically made within the context of your overall financial plan.
For many people, retirement accounts and life insurance policies make up much of their estate; so it is critical to make sure you understand how each of these assets will pass at your death. After completing and submitting the necessary paperwork for each account/policy, make sure to have written confirmation of the update and keep this for your records. Refer back to your attorney’s direction for any accounts opened in the future.
- TITLING NON-RETIREMENT ACCOUNTS AND OTHER ASSETS: Even though you have created a Trust, it won’t do any good unless you fund it. In addition to recommending how to update beneficiary designations, your attorney should also advise which assets should be titled in the name of your newly established Trust. We typically see homes and non-retirement assets re-titled into the name of the Trust.
Take some time for follow-up conversations with your attorney. Ask specifically how you should go about putting your new estate plan in place. After you have taken care of those details, you’ll feel the peace of mind that comes with a job well done.