“You can’t take it with you” is a common phrase I hear when it comes to money. Another great one I heard this week from a client is, “we are all just conduits.” In other words, money flows through us while we are here, and continues to flow, even after we are gone.
A relevant question to consider is where you prefer your money to flow after you are no longer the conduit. You do have some control over this, but the important part is you must make these decisions and express them before you die. Luckily, we have a formalized system that allows us to do this. But to be effective, we need to use the system properly, building bridges that take the assets where we want them to go.
Checking, Savings, and other Taxable Accounts (Including Individual Investment Accounts)
These accounts don’t automatically have a designated beneficiary, so if nothing else is done, the money in these accounts is considered part of your estate. Generally, that means it goes through Probate and is directed by your Will. If you don’t have a Will, then it would be directed according to the inheritance rules in your state, which could be inconsistent with your intended wishes. There’s a list of different state laws here.
You can have more say in how this money is distributed, as well as potentially make it easier on your heirs, if you complete a Transfer on Death, or TOD, request for these types of accounts. A TOD basically sets up a beneficiary who will gain control over the account right away, without having to pass through the steps of Probate or your Will. This can help for a more orderly and efficient transfer of your assets.
To set up a TOD, contact the institution where your money is held (bank, custodian, your advisor).
Retirement Accounts (IRA’s, Roth IRA’s, 401k’s, 403b’s, 457’s, pension plans, annuities, etc.)
You probably set up a beneficiary (or beneficiaries) when you opened your retirement account. (Do you remember that?) If you’re unsure about this, you may want to contact your HR Department or the custodian where the money is invested. This is important because the Beneficiary Forms on these types of accounts actually create what is referred to as a “Will Substitute.” You read that right – what you have on your Beneficiary Form supersedes whatever you have laid out in your Will. So it’s important to get these right and keep them updated.
If you don’t name a beneficiary, or if you name “My Estate” as your beneficiary, a couple of unfortunate things can happen for your heirs. First off, they may be required to probate your estate before they receive any of the assets. This can take several weeks or months, which could create liquidity problems, meaning that your heirs may not have access to the cash needed to pay the final bills of the estate. Secondly, your beneficiaries could potentially lose powerful tax advantages which are granted to inheritors, but not given to non-person entities (such as estates and trusts). Lastly, not naming a beneficiary can create confusion among those you leave behind as to what your intentions were.
Trust Accounts
These are actually the simplest to explain because the assets in a Trust Account are distributed according to the Trust Document. Trusts are quite flexible and can be laid out however you desire. For example, you could dictate that the money goes to your children, but only at a certain age or at a certain rate per year. However, be aware that with that flexibility can come complexity and cost.
Setting up a Trust usually requires a licensed Attorney who is well versed in Estate Planning. There is a cost to setting up a Trust, and, depending on the type of Trust you select, there could be additional costs to maintain the Trust.
If you have a simple situation and estate plan, I generally believe that a trust may not be necessary. However, I am not an estate planning attorney – so if you are considering a trust, you should seek the advice of an estate planning professional.
Naming A Charity
Finally, if you are charitably inclined, charities are often thrilled to receive assets from donors’ estates. This can be as simple as naming the charity on your Beneficiary Forms or your Trust (discussed above). You might also contact the charity directly as ask about giving options. Sometimes there are other ways to get your assets to your favorite charities, and they are often well prepared to help you set this up.
Since “you can’t take it with you,” a little forethought can be beneficial to those you leave behind. It can also bring you greater peace of mind. How would you like to see your money flow after you are no longer its conduit? If you would like further information or recommendations for estate planning attorneys, please contact us.