This is an article written by Bryce Helfer of Burns & Levinson (https://bit.ly/2zTQdEO) in Boston, Massachusetts, that we thought others may find helpful.
After working to finalize your estate plan, you’ve finally signed the documents and are ready to check this daunting task off your to-do list. Good work, but there are still a few more items to consider and some additional measures to take. One important step is to confirm both the way your accounts are titled, and the beneficiary designations chosen for your retirement accounts and life insurance.
WHY DO ACCOUNT TITLING & BENEFICIARY DESIGNATIONS MATTER?
The documents that you just executed typically only govern your assets that are a) titled in your name alone at your death or b) name your estate (i.e., your will or your trust document) as the recipient of your beneficiary-designated accounts and life insurance. Your estate planning documents likely include tax and trust planning strategies that only become utilized if assets are directed (meaning titled in your individual name / designated accordingly) to be governed by the terms of your estate plan. Therefore, proper account titling and beneficiary designations are critical to achieving your overall estate planning goals.
A MYRIAD OF TITLING OPTIONS
The possibilities for how an account may be titled are numerous and seemingly ever expanding. Consider a simple brokerage account that holds mutual funds and stocks. The account might be titled: in your individual name, in joint names between you and your spouse, in joint names between you and one or more of your children, in your individual name whereby another person (perhaps a child) has power of attorney authority over the account, or in your individual name with a payable-on-death beneficiary (i.e., who becomes the owner of the account at your death) designation.
Depending on how the brokerage account is titled, the terms of your will/trust may be irrelevant. For instance, if the brokerage account were held in your sole name without any payable-on-death designation, the account would be distributed as set forth under the terms of your will/trust upon your death. Compare this result with a brokerage account owned jointly with your spouse. At your death, because of this ownership structure, the account would automatically become the property of your spouse, and your estate planning documents would be irrelevant.
LIFE INSURANCE AND BENEFICIARY-DESIGNATED RETIREMENT ACCOUNTS
Life insurance and beneficiary-designated retirement accounts (e.g., your IRA) work in a similar fashion. At your death, these assets would be distributed as set forth in the beneficiary designation on file with the life insurance company or account custodian. Depending on the beneficiary designation, it might produce undesired results for your estate plan.
For instance, at your death, if you are survived by your spouse, your estate plan might direct certain trusts to be funded and administered for the benefit of your surviving spouse. If your life insurance beneficiary designation names your surviving spouse (individually) as the beneficiary of your policy (as opposed to your trust), the ability to fund the trusts using the life insurance proceeds might not be possible.
In addition, your estate plan might provide that once you and your spouse are no longer living, all of your property be held in a trust for your children. Therefore, you need to properly designate the name of the trust as the beneficiary of your retirement accounts and life insurance. If you name your children individually as beneficiaries (as opposed to the trust established for your children), then the children would be entitled to outright distributions of those assets, and the trusts would go unused. With that said, it might make sense to name your children individually as the beneficiary of certain retirement assets (like IRAs) but have life insurance proceeds paid to a trust for their benefit. It’s important to talk through these considerations with your estate planning attorney when making decisions relating to these types of assets.
The major takeaway is that proper account titling and beneficiary designations are crucial to making sure your estate plan functions as intended. Now that you’ve signed your estate planning documents, you should review your titling and designations with your estate planning attorney to ensure that the benefits of your estate plan are maximized.