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Who Gets It When You're Gone
Basic beneficiary designations First of all, a few disclaimers: I am not an estate attorney, nor a tax professional. The following is not a primer on estate or estate tax planning, but just some suggestions that come from experience in the financial industry, and constitute information rather than advice. Consult with your estate attorney and/or a tax professional before making any decisions about beneficiary planning. Given the current environment—rising costs of living, market volatility, high unemployment—it may seem somewhat optimistic to plan for having "enough" to last for your own lifetime, much less have anything left over to pass on to your loved ones. But let's think positively! Better to have a well-defined inheritance strategy than assume one won't be needed at all. Why Should I Specify Beneficiaries (Heirs) on My Assets?I think most of us who hope to have something to pass on to our heirs have pretty specific ideas about who should get what, but we often don't follow through with fairly simple planning to make sure 1) our wishes are carried out and 2) the inheritance process is as painless as possible for our heirs. Estate attorneys and tax professionals can help you determine which combination of structures and legal documents—will, trust, power of attorney, limited partnership, limited liability corporation, etc.—make the most sense for your situation and for current tax regulations, but even those documents and structures do little good if they are not properly implemented. Appropriate Registration (Account Titling) May Help Avoid ProbatePlease do your heirs and beneficiaries a huge favor, and plan wisely so they don't have to put your estate through probate.
Generally speaking, assets at certain levels held by "deceased persons" are subject to probate. Each state has different asset limits that "trigger" probate proceedings, so consult an estate attorney or review your state's inheritance/probate laws to see if they might apply in your case. However, there are ways to title your assets to avoid probate:
Assigning Beneficiaries to Accounts at Financial InstitutionsGenerally speaking, accounts or assets registered in the name of an entity, such as a trust, already specify flows of assets in their documentation, so I'm only going to address assets owned, at some level, by "persons." Retirement Accounts: IRAs, 401(k)s, Profit Sharing, Defined Benefit, Etc.Most retirement account paperwork includes a section where beneficiaries may be selected, as well as forms to change beneficiaries as needed. IRA (Individual Retirement Arrangement) beneficiary changes generally only require the signature of the account owner, while most employer-sponsored plans—such as 401(k)s—require the signature of the account owner's spouse.
Personal Non-Retirement Accounts: Individual, Joint, Etc.Some non-entity (entities being structures like trusts, corporations, partnerships, limited liability companies, etc.) personal non-retirement account types may be set up as "transfer on death" (TOD) or "paid on death" (POD) registrations. In our industry, these registrations generally include:
You should be able to contact your financial institution and request documents to add "transfer on death" or "paid on death" beneficiaries to your individual or joint account. Note: Consult with an estate attorney prior to registering an account as "transfer on death" or "paid on death" since some states' inheritance/probate codes do not support these designations. "Layers" of BeneficiariesMost assets that can be titled or registered to specify beneficiaries offer two "layers" of inheritance:
Since basic beneficiary designations are fairly simple, if you have complicated family situations or inheritance scenarios, you may want to discuss designating an entity (such as a trust) as a primary or contingent beneficiary with your estate attorney. As noted earlier, consulting an estate attorney about using a trust as a beneficiary on IRA or other retirement accounts is particularly important, since the trust must meet certain IRS guidelines to qualify to "pass" the assets through to the beneficiaries.
"Per Capita" versus "Per Stirpes"Per Capita (By Head)Generally, most beneficiary designations are "per capita" or "by head" by default. This means that the assets pass through to the beneficiaries by "head count." Example: Joe Smith has named each of his children Bob Smith and Sally Smith as 50% per capita primary beneficiaries on his IRA (head count of primary beneficiaries = 2). Bob predeceases Joe (head count of primary beneficiaries now = 1). Joe then dies without updating his beneficiary information. Sally inherits 100% of Joe's IRA since she's the only remaining primary beneficiary. Per Stirpes (By Branch)To visualize "per stirpes" (literally "by branch"), imagine a genealogical tree, where inheritance of assets passes on by "branch of the family" rather than by "head count." My clients sometimes use this designation as a way to pass assets on by generation: first layer = pass to children; per stirpes = pass to grandchildren. Typically, you have to pro-actively select "per stirpes" as an option on your beneficiary paperwork or forms for it to be in effect. Important note: Per stirpes designations typically require you to provide information on an executor or other contact on the account documentation or forms. Example: Joe Smith has named each of his children Bob Smith and Sally Smith as 50% per stirpes beneficiaries on his IRA (branch count = 2). Bob predeceases Joe, but has three living children (branch count still = 2 since Bob's branch of the family is still around). Joe then dies without updating his beneficiary information. Bob's children (Bob's "branch" of the family) inherit Bob's 50% of Joe's IRA. Sally inherits her 50% of Joe's IRA. Per stirpes definitions vary by state—some include stepchildren and adopted children, others don't—so you'll want to read your account documentation carefully and consult with an estate attorney prior to selecting this option. Since per stirpes legislation sometimes changes, you'll also want to revisit per stirpes designations every few years. Keep Those Beneficiary Designations Updated!Don't forget that your "pool of heirs" changes over time. You'll want to review your beneficiary designations every few years in case you need to make changes to accommodate:
You'd be surprised how often an ex-spouse ends up inheriting because the account owner neglected to update beneficiary information after the divorce… In addition to changes among your group of potential heirs, legislation changes make it a good idea to review your beneficiary designations every few years to accommodate:
Choose to Control Who Inherits & How Tough It Is to Do SoWhen it comes down to it, organizing how your assets are registered and who the beneficiaries are on your various assets puts you rather than a probate court judge in control of who gets it when you're gone. Go for providing your heirs with not just an inheritance, but an efficient inheritance!
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Cathlyn graduated magna cum laude with a B.A. in Comparative Literature from Dartmouth College and an M.A. in Performance Studies from New York University. Cathlyn joined PFS Group in 2004. Her professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam, and her financial services background includes over 12 years working with financial products, including managed futures and hedge funds. She enjoys the time she spends discussing our investments with current and potential clients. In her current position, Ms. Harris has helped to "brand" PFS Group with updated and improved marketing materials, and streamlined client service and back office procedures. Cathlyn is a voracious reader and loves the outdoors, singing with choral groups, and experimenting with recipes.