Working for over 20 years within the financial services industry I was surprised just how many people end up having no beneficiary or a previous spouse listed on life insurance policies, investment accounts, and even their wills.
To an extent, it is understandable life is busy, things change often, and before you know it, years have passed and you still have not gotten around to updating your beneficiaries.
Here are a few things you can do to make sure your money gets to your kids, not to the government or otherwise lost.
Check and update beneficiaries frequently
If you pass away while your accounts or policies are still in an undetermined state, your assets will go to probate as “intestate.”
This time-consuming and expensive process can very quickly eat up your assets and leave a much smaller estate for your loved ones than you had hoped.
To make sure this does not happen, review your beneficiary information after any major life event, including the birth of children, marriage, or a divorce.
Use a trust
If you happen to have a large estate and are concerned about protecting your assets, you may wish to set up a trust. Trusts can be set up in several ways, but irrevocable trusts typically have the best tax benefits.
Assets that are placed in a trust no longer belong to you, but to the trust itself. In many cases, this puts the assets out of the reach of estate taxes, and sometimes, even creditors.
Of course, you can still create stipulations on how it is used, and the money from it can be distributed while you are still alive. However, trusts can be and typically are quite complex, and it is helpful to work closely with an attorney who is experienced in the creation of effective trusts.
Examine your options carefully
There is more than one way to pass assets down to an heir, so before you decide on any method, you need to carefully explore your options. Direct gifts can lead to hefty tax penalties, especially when an item is higher in value or has greatly appreciated.
A “step-up in basis” might be the way to go, but it is important to remember that, sometimes, assets may step down instead.
It is also important to keep in mind that different tax rules apply to different assets. For example, 401Ks and IRAs are taxed differently than Roth accounts.
Property transfer
One thing to consider is titling accounts with joint tenants with the right of survivorship (JTWROS).
In short, a JTWROS is a legal status that determines how property is transferred after one homeowner dies. Ownership stake is jointly shared between the two individuals, whether they’re spouses, partners, or even roommates.
When one owner dies, ownership interest automatically passes to the other tenant.
Work with an attorney
While it is a good idea to do research on your own regarding your options for minimizing tax obligations in your estate plan, there is no replacing the experience and knowledge of a skilled attorney.
Your lawyer will sit down with you to gain a full understanding of your financial situation. From there, the attorney will develop a comprehensive estate plan customized to meet your unique needs.
