Most people undertake estate planning somewhat reluctantly, akin to getting a root canal. So it is no wonder that some people are not “all in” on the process. Sure, they sign their Wills and Powers of Attorney, but those follow-up tasks? Not so much. Despite instructions from the attorney on how to coordinate their various assets with the Will (or trust), they instead end up heeding the advice of a well-meaning albeit misguided clerk at a financial institution. They end up shooting themselves – and their estate plan – in the foot.
Executing your Will is only part of completing your estate plan. More and more in contemporary America, personal wealth is held in accounts/assets that do not pass directly under the terms of your Will.
Two very different classes of assets must be addressed here. First, life insurance and retirement accounts (e.g., IRAs, 401Ks), which always pass by beneficiary designation. Secondly, other accounts that could and should flow through your Will but on which you may have placed instructions for them to pass outside your Will (e.g., JTWROS, TOD, POD, and other accounts naming a beneficiary).
Life insurance should be designated to flow as your Will provides. However, we advise that you avoid passing life insurance to your “estate,” since that may sacrifice the creditor protection inherent in life insurance. For Farner & Perrin clients, you will have received instructions on how to designate the beneficiary of your life insurance policies, and you should follow that guidance. If you are unsure, always check with us.
Unlike life insurance, traditional IRAs and 40lKs are income taxable when received. For that reason, most people want to retain the best income tax deferral on these accounts after their death. Most married persons name their spouse as primary beneficiary for this reason, and they name “the testamentary trustee named in my Last Will” as their contingent beneficiary (assuming their Will establishes trusts for their children). However, over the last five to ten years, IRA custodians have become increasingly resistant to estate planners’ proposed language as above. Their legal departments are concerned about having to read and interpret customer Wills, especially with the increasing complexity of families, and the associated liability and risk. In response, our Firm can customize an Exhibit to attach to your IRA custodian’s beneficiary form.
By contrast to life insurance and retirement accounts, your non-retirement accounts should be held in a way to flow through your Will at your death. This means you should avoid JTWROS, TOD, and POD accounts, since all of those accounts will then pass to the named person/beneficiary, outside your Will. A JTWROS account is a joint account. TOD and POD accounts are single party accounts, naming the person(s) to whom the account passes at the owner’s death. Beyond these labels, brokerage firms have begun creating additional accounts for you to name a beneficiary at death, even though they are non-retirement accounts.
Avoid these. Instead, you should label your joint accounts as “tenants-in-common” (or TIC). And in the case of single party accounts, you should decline the brokerage firm’s invitation to have beneficiaries; ask for the account simply to be styled as a sole owner account, so it will pass under the terms of your Will. As a limited exception, if married you could retain one modest “operating checking account” with your spouse as JTWROS. This would avoid the need to change your auto-deposits and auto-payments, which makes sense if only a nominal amount goes outside your Will through this account.
In addition, many of our clients use a revocable management (living) trust instead of a Will as their central dispositive instrument, and similar issues apply in those cases. The difference is in the precise manner to designate the trust as the beneficiary of life insurance and retirement accounts. And generally all other assets should be held in the name of the trustee(s) of the trust, with the limited exception noted above.
For a more detailed discussion of this topic, you may wish to consult our Firm’s website under Educational Materials: Where There’s a Will, There’s a [Better] Way. Find it here.
Finally, we encourage all our clients to periodically confirm their beneficiaries on life insurance and retirement accounts and the styling of legal title on all other accounts and assets. We at Farner & Perrin are glad to assist with your periodic review as you may need.