Your Wealth, Your Terms: How to Coordinate Estate Plans with your Investment Accounts
When you create an estate plan, you are creating a roadmap for how your assets will be distributed after your death. This plan often includes a will, a trust, living will and beneficiary designations for all of your assets.
One of the most important aspects of estate planning is coordinating your estate planning documents with your investment account registrations and beneficiary designations. This ensures that how your accounts are titled reinforces your best wishes outlined in your estate documents.
Account Registrations
There are numerous types of account registrations:
Individual: This is the simplest type of registration and means that the account is owned by one person.
Joint with rights of survivorship (JTROS): This type of registration means that two or more people own the account together and that, if one person dies, the other person(s) automatically inherits their share of the account.
Tenancy in common (TIC): This type of registration means that two or more people own the account together, but that each person owns their own individual share of the account. If one person dies, their share of the account does not automatically go to the other owners.
Community property: This type of registration is only available in states that recognize community property laws. In these states, all assets acquired during marriage are considered to be owned by both spouses equally, regardless of whose name is on the title. If one spouse dies, the surviving spouse automatically inherits half of the community property.
Revocable living trust: This type of registration means that the account is owned by a trust, which is a legal entity that is created by a trustor. The trustor can name one or more beneficiaries who will inherit the assets in the trust when the trustor dies.
Irrevocable living trust: This type of registration is similar to a revocable living trust, but the trustor cannot change the terms of the trust once it is created. Furthermore, once assets are gifted/transferred to this trust, it is very difficult to pull them back to the grantor. This type of registration is often used for estate planning purposes.
Business entity: This type of registration means that the account is owned by a business entity, such as a corporation or partnership. The ownership of the account will depend on the specific structure of the business entity.
Different account registrations come with various pros & cons. For example, a JTROS account automatically transfers full ownership of the account assets after the first death. This could be a great feature for a bank account, where the surviving spouse might need immediate access to cash to pay bills. It can however create an issue with large investment accounts, if the surviving spouse is trying to disclaim receipt of these funds and divert them to a trust (ie: bypass trust, marital exemption trust, credit shelter trust).
A simple change of account registration type can save the estate a significant amount of time in probate and potentially a large amount of estate taxes. Be sure to ask your financial advisor if your account registrations are appropriate, given your estate documents.
The type of account registration you choose will depend on your individual circumstances and estate planning goals.
Beneficiary Designations
A beneficiary designation specifies who you want to receive your assets after your death. You can designate beneficiaries for all of your assets, including your bank accounts, investment accounts, retirement accounts, and life insurance policies.
Important - Beneficiary designations often take precedence over a will. In some cases, we have observed clients list one party as the beneficiary in their Will, but failed to update the beneficiary designation for that account or insurance policy. For example, if someone lists their children as beneficiary in their Will, but still have their brother/sister listed as beneficiary on the account registration – the funds will go to the brother/sister, and not the children. This is sometimes referred to as the “100% estate tax”, because 100% of your funds are not going to the party you intended.
It is important to coordinate your beneficiary designations with your estate planning documents. For example, if you have a will that leaves your assets to your children, you should also designate your children as the beneficiaries of your investment accounts, or list the estate as the beneficiary so that the executor of your will can distribute them based upon your estate documents. This will ensure that your assets are distributed according to your wishes, regardless of which document is ultimately used to distribute your estate.
Three Reasons Why It's Important to Coordinate
There are three reasons why it is important to coordinate your estate planning documents, beneficiary designations and account registrations.
If you do not coordinate your estate planning documents and account registrations, it is possible that your assets will not be distributed according to your wishes. For example, if you have a will that leaves your assets to your children, but you have not designated your children as the beneficiaries of your investment accounts, your spouse or another party may inherit your investment accounts instead.
In addition, if you do not coordinate your estate planning documents and account registrations, your assets may be subject to probate. Probate is a state-supervised legal process that is used to distribute the assets of a person who has died. The probate process can be time-consuming and expensive, and it can also make it difficult for your beneficiaries to access your assets. In some extreme cases the probate process can take over a year, meaning your family members are waiting to receive funds you intended for them.
Finally, if you do not coordinate your estate planning documents and account registrations, your assets may be vulnerable to creditors and predators. If you have creditors, they may be able to seize your assets, even if you have a will that leaves your assets to your beneficiaries. Predators may also try to take advantage of you or your beneficiaries by claiming that they are entitled to your assets.
How do we get this setup correctly?
The best way to ensure you have coordinated your estate planning documents and account registrations, is to work with an estate planning attorney and a financial advisor. Your estate planning attorney can help you create a comprehensive estate plan that includes a will, a trust, and beneficiary designations for all your assets. Your financial advisor can help you understand the different types of account registrations and beneficiary designations, and they can help you ensure that your account registrations and beneficiary designations are consistent with your estate plan.
It is also important to review your estate planning documents and account registrations regularly. Your circumstances may change over time, so it is important to make sure that your estate plan and account registrations reflect your current wishes.
Conclusion
Coordinating your estate planning documents and account registrations is an important part of estate planning. By doing so, you can ensure that your assets will be distributed according to your wishes, regardless of how your accounts are titled. You can also help to avoid probate, protect your assets from creditors and predators, and make it easier for your beneficiaries to access your assets after your death.
If you have not yet coordinated your estate planning documents and account registrations, I encourage you to work with an estate planning attorney and a financial advisor to get started.
DISCLOSURES:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.
