You want to protect the people who are most important to you. Having a solid estate plan in place serves to provide for your loved ones when and if you are no longer around to do so. The following sections address the three most pressing questions people have about their estate plan: Where will my money go? How will it get there? What should I do if I want to leave money to charity?
For a majority of our clients, retirement accounts hold the bulk of their asset base. Such accounts may include their IRAs, Roth IRAs, 401(k)s, life insurance policies, annuities and more.
While many of an individual’s assets will be transferred at death by their will, a majority of their retirement accounts have beneficiary designations that guide how each asset will pass. If you do not have beneficiary designations in place, or these designations do not match what is outlined in your will, you or your family may encounter problems further down the road.
If your estate is fairly simple, you can use beneficiary designations to direct how your assets will be managed at your time of death. However, as you get older and accumulate more assets, it is essential to have a properly drafted will to guide when and how your assets will be distributed. This may require more in-depth estate planning and periodical reviews to ensure your legacy is protected and your money moves in the direction you intended.
It is important to note that certain assets will pass by beneficiary designations, regardless of provisions in your will. For example, since life insurance policies are contracts between a policy owner and an insurance company, life insurance proceeds will be paid to the named beneficiary, even if your will says otherwise. Neglecting necessary changes to beneficiary designations can often result in unnecessary costs to resolve disputes among family members, which can be avoided by early planning. Therefore, it’s critical to regularly consult with your attorney and financial professionals to confirm that your assets will be distributed in accordance with your wishes.
A testamentary trust can help ensure your money moves to your beneficiaries when and how you want it to. If your will does not include testamentary trusts, your assets will pass to your beneficiaries directly. Those assets will be included in their estates and will be subject to creditors in the instance of a divorce or lawsuit. Without the use of testamentary trusts, there is also no assurance that the assets will stay in the hands of your family.
Additionally, if your children are young adults when you pass, they may have immediate access to a large sum of money. Depending on your child’s money management skills, this may be a concern worth addressing. Testamentary trusts can allow for another person to manage your child’s assets until they the child reaches an age at which they may be better equipped to make wise financial decisions.
Consider that you have a child, age 18, and you have accumulated $1 million in your 401(k) and $1 million in life insurance benefits. What if you and your spouse passed away today? What would happen to your estate? Your child is no longer a minor so they would inherit $2 million and have outright control over those funds. While many 18-year-olds are quite responsible, it may be an overwhelming responsibility to manage that amount of money. Setting up a trust for them in your will could allow for an older, more responsible adult to step in to control and protect the assets for the benefit of your child, until he or she is old enough to make those decisions for themselves.
Such situations illustrate the importance of reviewing and updating your will, beneficiary designations, and additional supporting documents after any major life event (divorce, remarriage, birth of children, etc.), or any time you update your legal documents.
In addition to helping family members, many people want to support charity with the assets they leave behind. In such cases, it is generally better to donate a qualified retirement plan to charity instead of a Roth IRA or after-tax account. Why? Because charitable organizations do not have to pay income taxes and you can save your tax-free accounts for your beneficiaries who do have to pay income taxes. You can also receive an estate tax deduction by donating to charity (if applicable).
If you are charitably inclined and want to include charities in your will, be cautious of how you set up your estate plan.
For example, consider that you name both a charity and your spouse/child as beneficiaries to an IRA account. If the retirement account is not split between beneficiaries in a timely manner, your loved ones may be forced to take their share of the retirement account out all at once instead of over their respective lifetimes. As a result, they will miss out on the tax-deferred status of an Inherited IRA and pay more taxes on the money you leave behind.
A well-drafted and coordinated estate plan is a crucial piece of a comprehensive financial plan. You should review your wills and beneficiary designations a minimum of every 5 years, or anytime you have a major life event, to ensure that the estate you have worked so hard to build is protected for your loved ones. Take a second look at your estate plan with the help of a Willis Johnson & Associates advisor by scheduling a free consultation today.
Alexis Long is a wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. Understanding what is truly important to a client is key to good financial planning, along with providing solid technical advice.
Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.