Estate Planning: Organizing Your Estate Through Account Titling and Beneficiary Designations

Very often, clients will complete their estate planning documents with an attorney and find themselves asking, “What now?” They will have an impressively large stack of legal documents but no clear understanding of how these should be applied to their financial assets. This article aims to address the next step in the estate plan: the process of titling accounts and updating beneficiary designations to align with your estate plan.

For more information on basic estate planning documents, please see our previous article “Preparing for Retirement: Estate Planning.”

To begin, it is important to understand how assets can potentially transfer at death. There are four basic ways this can occur:

By Law: The most common example of this is joint account ownership between spouses. If one spouse dies, full ownership of the account legally passes to the surviving spouse.

By Beneficiary Designation: This most frequently applies to retirement accounts such as IRAs, 401(k)s, life insurance, and annuities.

By Trust: For accounts that are titled in the name of a trust, the distribution of assets will follow the terms of the trust. Keep in mind that naming beneficiaries on your accounts generally supersedes any will or trust planning already in place.

By Probate: This is the court-led process of distributing any assets that were not distributed via any of the three previous methods. The common goal is to avoid (or at least minimize) assets in probate. The process can be expensive, time-consuming, subject to public record, and likely allows your executor less flexibility than a non-probate estate.

• Note: A probate estate is considered testate if the individual had a valid will, while an estate without a valid will is considered intestate. Testate probates will generally follow the terms of the will, while intestate probates will be distributed based on state law.

The next step is to review your investments and determine which of the above options may be appropriate for any given asset. Below is a breakdown of how this is commonly applied to various assets, along with a few key considerations:

Non-Retirement Investment Assets

Examples: Checking account, savings account, taxable brokerage accounts

The Basics: Most non-retirement assets are often titled in the name of a revocable trust. It is important to understand the terms of your trust and ensure the eventual distributions at death align with your goals. Any desired changes to the ultimate distribution of an account would be handled by amending the trust, rather than retitling the account.

Other Considerations:

• In certain situations, it may make sense to intentionally hold an account outside of the trust. For example, married couples may retain a joint checking account so that the surviving spouse will have ongoing access to the funds at the death of the first spouse.
• If you do not have a revocable trust, it may make sense to add a Transfer on Death (TOD) beneficiary designation to these accounts. These can also be added as a second layer of protection to a spousal joint account, directing where the funds would go if both spouses were to pass away.

Retirement Assets

Examples: 401(k)s, IRAs, and Roth IRAs

The Basics: These assets are almost exclusively distributed via beneficiary designations. It is beneficial to list two tiers of beneficiaries: primary and contingent (secondary). Spouses are often listed as primary beneficiaries, with children as contingents. Depending on the specifics of your estate plan, it may alternatively make sense to list a trust as a primary or contingent beneficiary.

Other Considerations:

• Make sure to talk through the potential nuances of your beneficiary plan. Common questions include: If one of my children passes away, do I want my grandchildren to inherit their share? Should grandchildren receive any assets directly when I pass away? What if I want to give something to my children or grandchildren when the first spouse passes away? What if my child does not seem ready to inherit these assets? These are often sensitive, thought-provoking discussions that can be navigated with your JMG advisor.
• For those with philanthropic intent, pre-tax retirement accounts can be ideal for charitable beneficiaries. The assets can transfer to charity without paying income tax on the distribution, which would likely have been paid by other beneficiaries.

Real Estate

Examples: Primary residence, second homes, investment properties

The Basics: Primary residences are often titled to a revocable trust or held jointly in various forms, such as tenancy by the entirety. The proper registration depends on your state of residency and estate plan. For second homes and investment properties, it is more likely that the properties will be held in a revocable trust. The titling of real estate in non-resident states is an important consideration to avoid probate in a second, non-resident state.

A Few Other Topics to Consider:

• Even for a well-organized and properly titled estate, the estate administration process can be arduous. Simplification, consolidation, and good record-keeping are actions that can be taken now to alleviate the eventual burden for your executor and trustee.
• Consider informing your executor and trustee that they have been named in your estate documents. This conversation can help better frame your estate goals and allow the named individual to voice any questions or concerns.
• Both your financial goals and the composition of your balance sheet will evolve over time. Make sure to revisit your account titling and beneficiary designations at least every few years to ensure they still align with your goals.

Taking the above steps should provide a more organized estate. That said, it may not address other estate issues such as exposure to federal and state estate taxes. Our next article will address more advanced estate planning techniques to help combat these issues. Please feel free to share this article with someone who may find it helpful.

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by JMG Financial Group Ltd. (“JMG”), or any non-investment related content, made reference to directly or indirectly in this writing will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this writing serves as the receipt of, or as a substitute for, personalized investment advice from JMG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JMG is neither a law firm, nor a certified public accounting firm, and no portion of the content provided in this writing should be construed as legal or accounting advice. A copy of JMG’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a JMG client, please remember to contact JMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. JMG shall continue to rely on the accuracy of information that you have provided.

To the extent provided in this writing, historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices. Indices are not available for direct investment.