Ed. Note: This article first appeared in Market Watch
Imagine your spouse is ill, and you meet with an estate planning attorney to get your family affairs in order. Your attorney drafts a trust document and a will. You and your spouse sign it. You think everything is fine.
Your spouse passes, and shortly after that, you find that the accounts are not set up to transfer the way you both intended. Everything is not fine. Can this happen?
Yes, and it happens all the time.
This same kind of situation happened to a client couple that I’ll call Ralph and Sue. It was a second marriage, they had no children in common, but Sue had two children from her first marriage. She and Ralph had been together for 10 years when Sue was diagnosed with pancreatic cancer. They met with an attorney right away.
They both agreed that Sue’s assets would be divided one-third each to Ralph and her two children. Here’s the problem. Most of Sue’s assets were in her company 401(k). The beneficiary on the 401(k) was Ralph, and although the trust document was fine, no one changed the 401(k) beneficiary
Upon Sue’s passing, Ralph tried to get the 401(k) to send one-third to each of Sue’s children, but legally, the company is required to distribute the account according to the most recent beneficiary designation on file.
Ralph, being a good guy, rolled the 401(k) to his own IRA, withdrew the portion for the kids, paid the tax, and gave each of Sue’s children one-third of it. If the beneficiary form had been updated to list the children as direct beneficiaries of the 401(k), the tax cost would have been far less. These types of estate planning mistakes happen too often.
Professor Richard Thaler, an expert in behavioral economics, talked to MarketWatch about his ‘lazy’ investing strategy that allows investors to maximize their returns while doing very little.
When you think of estate planning, you probably picture a meeting with an attorney to prepare or update a will, trust, or a power of attorney. Yes, this is estate planning. But, even if you have never drawn up a will or met with an attorney to draft a trust, you are still actively, and often unknowingly, engaged in estate planning. It happens each time you open an account, name a beneficiary on an IRA, 401(k), annuity, or life insurance policy, or title a piece of real estate.
If you do have a will and trust, these account titles and beneficiary designations supersede what your will and trust say. And when the titles and beneficiaries are not set up correctly, it can result in cumbersome (and possibly expensive) consequences for your family.
Take the case of George, a successful businessman now in his 80s. George had accounts with many brokerage firms and hired us to help him understand his investments. He wanted an independent advisor to explain things.
In reviewing his accounts, we noticed many of the accounts listed only George or his wife as the owner. We asked George’s permission to talk to his attorney. George agreed. The attorney advised that the account titles needed to be changed to reflect their trust as the owner.
Unfortunately, George’s wife passed away before this was done. Many accounts must now go through probate. For George, this will be costly and time-consuming. And it could have been avoided.
In my financial planning business, it is standard operating procedure to discuss account titles and beneficiaries before we open accounts. But many investment firms, financial advisors, and banks don’t operate that way.
They will open the account and ask few questions. That means the responsibility is on you to make sure that there isn’t a lurking administrative nightmare waiting for your spouse or family.
When an account is jointly titled or has a direct beneficiary, it doesn’t have to go through the probate process. It gets passed directly to the intended person. There are many ways to add beneficiaries to accounts.
These types of designations may be called Payable on Death(POD), Transfer on Death (TOD) or Designated Beneficiary Accounts. Real estate can be titled this way too.
All retirement accounts, life insurance policies, or annuities offer you the ability to name a beneficiary. You must periodically review and update these beneficiaries. A will or trust won’t take care of it.
Most people I talk to don’t want to be a burden on their family or children. One of the best things you can do to accomplish this goal is to get your estate planning in order. It may take some time, and a bit of paperwork, but when it’s done, the peace of mind you’ll feel is amazing.
Posted by: The Trust Advisor