This is the start of a multi-part series covering what I would consider “The Basics of Estate Planning.” As Financial Advisors, we wear many hats as we help our clients navigate their Wealth Management Journey. While money management is our primary role, much of our value comes in the overall financial planning process. One of the pillars of financial planning is Estate Planning. The term “Estate Planning” makes most people think of writing a Will or getting Life Insurance. These are important things and absolutely have their place but practically, Estate Planning is much more. In this multi-part series, I will cover the following topics:
- Beneficiary Designations and Transfer on Death
- What is a Trust and do you need one?
- Financial Power of Attorney
- Cost Basis and Cost Basis Step Up
It’s important to remember that we are not attorneys or CPAs and cannot give tax or legal advice. Most of what we will cover are the practical things you can do now to get your financial house in order and some things to consider that may cause you to seek professional legal or tax advice.
Beneficiary Designations and Transfer on Death Designations
When it comes to planning for asset transfer upon your death (sorry for being morbid), the easiest way to ensure that your loved ones will have a smooth transition of your accounts is Beneficiary Designation. On a retirement account (Traditional or Roth IRA, 401k, 403b, etc.) you can elect to have a beneficiary or multiple beneficiaries on the account. Designating beneficiaries will trump any other type of planning (Will, Trust, etc.) and will allow for your accounts to transfer to your designated loved one or organization in a very smooth manner. All the beneficiary has to do is provide a death certificate and the entity holding the account will make the arrangements.
Per Stirpes vs. Per Capita Election
With your beneficiary designation, you also have the option to elect “Per Stirpes” or “Per Capita”. Per Stirpes stipulates that if your beneficiary is deceased, their share of the account will be distributed to their descendants. If you elect Per Capita then that beneficiary’s share would be distributed to the other beneficiaries equally.
John has a $1,000,000 IRA account and designates the primary beneficiaries to be his two children, Jack and Jill (each 50%).
John passes away and during his estate settlement, we are informed that Jack has been involved in a terrible accident involving a hill and a pail and has tragically passed away. Under Per Stirpes Jack’s share would be distributed to his heirs. If Per Capita had been elected then Jack’s share would be distributed to Jill, the only remaining beneficiary. There is nothing wrong with either one, but it’s important to understand the difference.
In most instances you can also designate a contingent beneficiary or beneficiaries that the accounts would pass to in the event your primary beneficiary is deceased.
Transfer on Death for Non-Retirement Accounts
Non-Retirement accounts (often referred to as taxable accounts) can do virtually the same thing as a retirement account. They are referred to as “Transfer on Death” designations (TOD for short). Please keep in mind that not all institutions offer them and not all states allow them. Not all non-retirement accounts are eligible for a TOD designation (think Trust account – we will cover those in another part of this series). The account type will be a primary driver in whether or not a Transfer On Death designation is permitted. In most cases, it’s a simple form. Most banks will allow you to add this to your accounts (at many banks they refer to this as Payable on Death or POD). Some states allow your home to have a Transfer on Death Deed as well.
Beneficiary designations are one of the easiest ways to make sure that your final wishes are honored and are done so with little stress or difficulty to your loved ones. We would be happy to discuss your situation and whether these designations make sense for your financial plan.
Until next time.