Is Having a Will Good Enough?
Just having a Will is often not good enough! But if you get your beneficiary designations right and want to keep things simple, you might not need a trust.
There are many different aspects to estate planning. Let’s not get into the complexities of asset protection and estate taxes during the great transition.
But if we want to simply focus on who gets your assets, then when is your “final testament” not the right place to leave your assets?
When a Will is not the right place to leave your assets
Wills are public records. You might not want to display your laundry publicly. If that’s the case, you can have a simple “pour-over” will that dumps everything that doesn’t pass via beneficiary designation or contract of law into your revocable trust. Of course, part the the reason you have a trust is to make things easier on your family when you pass, so make sure you property title the proper assets into the trust.
Will must be probated by the court. In in some states, the probate process can be expensive. You may lose a percent or two of your assets on probate. Or worse. Family or creditors can contest wills.
Next, remember that probate is state specific. Read about the laws in your state when you are planning your Will.
Not all assets are passed on by wills, however. Consider the alternatives to Wills as they will save you time and money.
What are the alternatives?
Assets pass from you to your heirs several ways. Each way has several advantages over passing via will. Alternatives are:
Contract of Law:
Property titled with rights of survivorship pass outside the will
Name your assets to a living (or revocable) trust now. Trusts offer privacy, protection and control. If you need to protect your heirs’ future assets (from creditors or bankruptcy) or control them (usually from the heirs’ poor behavior, but also for Special Needs Trusts), then trusts are a must.
This is IMPORTANT! Beneficiary Designation Forms are the easiest yet most misunderstood mechanism to pass wealth
The simplest thing you can do today to improve your estate plan is to make sure your beneficiary designations are correct.
Make sure you take full advantage of your Beneficiary Designations wherever possible
All retirement accounts and some other accounts have beneficiary designation forms.
First off, NEVER leave your estate as beneficiary, as this pulls all the assets into probate.
Secondly, do not name a trust as beneficiary or retirement accounts.
Since the death of the Stretch IRA due to the Secure Act, this is especially true! Trusts that are set up as accumulation trusts (as opposed to “see through” or conduit trusts) can have some pretty horrific tax consequences These old trusts may force the money to stay in until year 10, and then be distributed all at once. Estate lawyers are still figuring their way around post-Secure Act trusts, so my best advice right now- don’t die yet.
We will miss the Stretch IRA! A 10-year distribution is not nearly as nice as the Stretch IRA.
There are alternatives to the Stretch IRA to be considered, however. A Charitable Remainder Trust, AKA The Pseudo-Stretch, is something to consider if partial Roth Conversions are not ideal.
Who Should Be Beneficiary?
If you are married, it is pretty easy to make your spouse the primary beneficiary of your accounts that have beneficiary forms.
Charities also love to be named as beneficiaries, but there are some pretty strict rules that need to be followed. Charities are not designated beneficiaries as they do not have a pulse, so make sure their share of the retirement plan gets separated off by the required date.
If you have large retirement accounts and want to leave money to your heirs, then you have some planning to do.
Since the Stretch is gone, I really like Lange’s Cascading Beneficiary Plan. It will take take some serious thinking to get the cascade just right, but let’s make it simple for an example. Say you have a big IRA you want to leave behind. If you have your spouse as primary beneficiary and your kids as contingent beneficiaries, then when you die, your spouse can take what he or she needs for the rest of his or her life, and disclaim the rest.
This Disclaimer Planning is powerful, as it gives the potential to give two 10-year stretches. They can get, say, half upon the death of the first spouse and take that over 10 years, then the rest when the second spouse dies.
Just remember, someone is going to have to pay the taxes on your pre-tax money. Thinking about taxes is just about as fun as thinking about death, but both will happen! Take some time now to optimize your estate plan and get your end in order.