Overview
Effective estate planning strategies can help alleviate potential challenges when transferring assets to heirs. Below is an overview of key estate planning documents that can offer valuable assistance:
Beneficiary Designations
Beneficiary designations allow assets to pass to beneficiaries without going through probate or requiring other estate planning documents. Beneficiaries can be individuals or trusts/organizations, and the designations apply to employer retirement accounts, all IRAs, life insurance, and potentially taxable accounts and bank accounts with the proper titling.
POD & TOD Designations
Taxable accounts generally do not have beneficiary designations. You can still add beneficiaries to these accounts by adding a payable-on-death (POD) or transfer-on-death (TOD) designation to these accounts, which achieves the same outcome as a named beneficiary.
Transfer-on-Death (TOD) Deed
A transfer on death (TOD) deed, otherwise known as a beneficiary deed, can be used to name a beneficiary to receive property after the owner dies. During the owner’s lifetime, they retain full control of the property, and upon the owner’s death, the deed becomes effective and the property transfers to the beneficiaries, allowing the property to avoid probate.
Will
A will is written during a person’s lifetime to describe how their assets and matters should be handled after their death. Wills are important documents in the estate planning process as they can address asset distribution, guardianship of minor children, dependents, or pets, appointing an administrator for the estate, and charitable donations. Wills can be limited in function, as they must go through the public and timely court process known as probate. To bypass the probate process, a revocable trust can be used simultaneously.
Revocable Trust
A revocable trust is established to bypass the probate process and ensure the proper transfer of assets to one’s heirs upon death. While a will takes effect only after death, a revocable trust takes effect while an individual is still alive. By funding a revocable trust, an individual retains control over the assets until death and has the flexibility to change or amend the trust’s terms. At death, the assets are distributed outside of probate and according to the trust’s terms.
Combining a will and a revocable trust allows one to minimize assets that pass through the probate process. They both have important uses, namely a trust passes assets according to wishes, while the will can address important matters, such as guardianship and other decisions that a trust cannot.
Living Will and Springing Power(s) of Attorney
One can establish a living will during their lifetime to outline their wishes regarding medical treatment if they were to become incapacitated. Additionally, a springing power of attorney can be created to allow someone to make decisions on their behalf if certain conditions, such as incapacitation, are met. The two common types of power(s) of attorney include:
- Financial Power of Attorney: Grants authority over financial matters, such as paying bills, filing taxes, and investing money.
- Healthcare Power of Attorney: Grants authority over healthcare decisions and the ability to speak with medical professionals.
Conclusion
Wills, revocable trusts, and beneficiary designations are valuable tools for ensuring that assets are distributed and loved ones are cared for according to one’s wishes after death. It is important to update asset titles and beneficiary designations as part of the estate planning process and to review them regularly. While these tools are highly beneficial, they can also be complex. Please reach out to your financial advisor or estate planning attorney with questions.
