Just because you completed your last will and testament and revocable living trust, does not mean the work on your estate plan is completely finished. In addition to having signed documents, you need to make sure all the beneficiary designations on your accounts and the titles of assets like real estate are set in accordance with your will.
Forget to take that last step and you may end up leaving assets inadvertently to an ex-spouse or former friend. Plus, you'll want to be sure your intentions are well communicated to your loved ones.
What to do? Here are tips and a checklist to help you make sure your estate plan can be carried out the way you planned.
Start by updating beneficiaries
"One of the biggest mistakes people make at the end stages of the estate planning process is not updating their beneficiaries," says Sander Bleustein, vice president, advanced planning at Fidelity Investments in Naples, Florida. "Many people are not aware that beneficiary designations supersede the will or trust, making this a critical step in determining what happens to your assets after you die."
A beneficiary is an individual who receives the benefit from an estate, trust, retirement account, life insurance policy, or account with a transfer on death (TOD) designation. This allows ownership of the account to be transferred to a designated beneficiary upon the owner's death.
Many times beneficiary designations are not set up properly, resulting in the distribution of those assets differently than intended. For example, your will or revocable trust may have provisions to leave your assets to an irrevocable trust for your heirs that gives you the ability to control the ultimate distribution of the assets upon your death. If the beneficiary designation on your accounts names the heirs directly, it would give them unfettered access to the assets immediately.
Remember, having beneficiaries designated on an account, such as a brokerage account, 401(k), or IRA, allows the account to pass outside probate, enabling your beneficiaries to avoid the time and expense of the probate process.
Tip: Some retirement plans may automatically designate your spouse as the beneficiary unless you name another beneficiary and your spouse has consented to the designation in writing. Check with your plan's governing documents to understand its beneficiary designation policy.
A checklist for you
As you put the finishing touches on your estate plan, here are some important steps to consider:
- Carefully review the detailed letters of instruction from the estate planning attorney, and work with your financial advisor and attorney to take action, such as updating beneficiaries, retitling assets, etc.
- Review and update life insurance policies and/or retirement plan beneficiaries.
- Create a list of your digital assets and name a successor to handle them. Read Viewpoints on Fidelity.com: Estate planning for the digital era
- Consider writing a memo to direct the specific pieces of "Tangible Personal Property" (furnishings, jewelry, automobiles, collectibles) you want to leave to certain individuals, if this is allowed in your state and is part of your will or trust.
- Consider drafting and regularly updating a letter of instruction to your children and/or fiduciaries. This letter should include an inventory of assets and a list containing names, addresses, and phone numbers of your various advisors (for example, your attorney, accountant, financial professional, or banker).
Tip: Many families today use secure virtual safes such as FidSafe® to store copies of important documents and other information, such as passwords, financial statements, and wills. In addition, a financial advisor may be able to assist with:
- Re-registrations of financial assets
- Mapping certain financial assets to your overall financial plan
- Consolidating assets from other financial services firms (if necessary) with the goal of simplifying recordkeeping and administration
- Connecting you to additional resources or expertise such as tax planning and charitable giving
Fund trusts by retitling assets
There are many types of trusts to consider, each designed to help achieve a specific goal. An estate planning professional can help you determine which type (or types) of trusts are appropriate for you. A trust, whether revocable or irrevocable, is a legal arrangement for the transfer of property by a grantor to a trustee for the benefit of a beneficiary.
A critical element of estate planning, often overlooked, is that you, known as "the grantor," should transfer (retitle) certain assets to the trust. If your estate plan calls for converting your individual account into a trust account, that does not happen automatically. "We often work with clients to correctly title and register assets such as their investment accounts," says Bleustein.
For example, if your estate plan includes a revocable living trust, you need to title assets in the trust. This process is often called "funding the trust". The assets that typically are owned by a revocable trust can include:
- Taxable brokerage accounts
- Bank accounts and certificates of deposit
- US savings bonds
- Investment real estate
- Second homes (in some states, attorneys advise the client to title their primary residence in their trust as well; it generally depends on probate, homestead provisions, and trust statutes, by state)
- Business interests
- Limited liability company (LLC) and partnership interests
If a trust is not properly funded, those assets pass through the will and could be contested. The property could end up in probate, become a public matter, and possibly be distributed in a manner that is against your wishes. So if you decided to create a trust, make sure to work with a lawyer and financial advisor to get the titling of the assets and funding of the trust correctly implemented.
Tip: Read Viewpoints on Fidelity.com: Is a trust right for you?
What happens to your assets after you die?
Here's a breakdown by different types of assets and accounts.
| Type of account ownership | Examples of commonly held accounts or assets | What happens after someone dies |
|---|---|---|
| Individually named account with no transfer on death (TOD) or beneficiary designations |
|
Accounts in the decedent's name will pass through their estate via the decedent's will. |
| Pay on death or transfer on death |
|
Upon death, assets are transferred to an account of a named beneficiary. |
| Joint tenants with rights of survivorship/joint tenants by the entirety |
|
Upon death, the surviving joint tenant automatically becomes the owner of the entire account. |
| Joint tenants-in-common* |
|
Upon death, the deceased joint owner's portion of the account does not automatically pass to the surviving joint tenant and instead passes through the decedent's taxable estate via their will. |
| Business entity |
|
If not owned by a trust, the decedent's ownership interest in a business may pass through their estate via their will. |
| Revocable trust |
|
Assets in the decedent's name are part of their taxable estate and the named co-trustee or successor trustee takes over to administer the trust. |
| Irrevocable trust |
|
Assets are likely already outside of the grantor's estate and the trustee is responsible for administering the assets in the trust according to the grantor's wishes. |
Is it time to update your estate plan?
Many estate plans no longer meet their original intent due to inattention and a lack of routine updating. Death, birth, marriage, divorce, changing financial circumstances, and owning property in multiple states are some of the many reasons estate plans become outdated.
"As you update your estate plan, it's critical to get your beneficiaries right, correctly title or retitle your assets, and remember to fund a trust, if applicable," says Bleustein.