Two Estate Planning Issues You Should Never Overlook

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Editor’s note: This is the second article in a monthly step-by-step guide for getting your financial house in order. Yes, it’s a daunting process, but we’re breaking it down into manageable steps that you can take each month until the task is done. In April, we brought you How to Put Together Your Personal Net Worth Statement. For May, we’re tackling asset titling and beneficiary designations.

When it comes to estate planning, many people spend time crafting a solid will or trust, but they often overlook two critical pieces of the puzzle — how their assets are titled and who they've named as beneficiaries. Yet these details often determine how smoothly (and privately) your wealth will transfer after your death.

Asset titling and beneficiary designations can reduce the need for assets to go through probate and can simplify transfers post-death. However, they need to be well coordinated with the person’s estate plan, so it’s worth taking the time to review them as well.

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Start with the basics: Review every asset

Using the personal net worth statement you created in April (link above in the editor’s note), review each asset listed, paying careful attention to how it is titled and, if relevant, who is named as the beneficiary. Answer these questions:

Are you the sole owner?
Do you own it jointly with someone else?
Is it held in a trust?
Do your named beneficiaries still make sense with your current life circumstances?

Even a well-constructed estate plan can be thrown off course if asset titling and beneficiary designations are inconsistent or outdated. It is important to note that your beneficiary designations override what’s written in your will or trust, so it’s crucial to ensure they’re aligned with your overall estate plan.

Beneficiary designations: Simple, but easily overlooked

Certain assets — like retirement accounts, life insurance policies and annuities — let you name a beneficiary directly. These designations typically allow the asset to transfer outside of probate, which can save time, legal fees and unnecessary complexity.

(Note: Oftentimes, people confuse the concept of “going through probate” with the concept of whether an asset will be subject to estate tax. These are two different concepts. Probate is the court process that facilitates the transfer of assets from the decedent to the person’s beneficiaries. Whether an asset will be subject to estate tax is dependent on whether the decedent had control over the asset. For purposes of this article, we are focusing on how an asset is titled in order to avoid the probate process.)

Other accounts, such as certain bank or investment accounts, may offer "payable on death" (POD) or "transfer on death" (TOD) options. These also allow assets to bypass probate and go directly to your named beneficiaries.

If these options are so simple, what’s the problem? Too many people set these designations once and never revisit them. Life changes — marriages, divorces, births, deaths — can render old designations obsolete or even problematic.

A forgotten ex-spouse or a deceased beneficiary could derail your intentions. That’s why a regular review — at least once a year or after any major life change — is essential.

Also, don’t forget to name contingent beneficiaries. If your primary beneficiary passes away before you, having a backup ensures the asset still goes to someone of your choosing rather than defaulting to your estate.

What happens if there’s no designation?

Assets that are held solely in your name with no beneficiary or TOD/POD designation generally must go through the court probate process in the state in which the asset is located.

If you have a will, the assets will be distributed according to the provisions in your will — but will be under the oversight of the court.

If you don’t have a will, state intestacy laws determine who gets what, which may not reflect your wishes. Plus, any asset that goes through probate is open to creditor claims.

Joint ownership: Titling matters

If assets are held jointly, most often with a spouse, the way they are titled matters. Joint ownership isn’t one-size-fits-all.

Joint tenants with rights of survivorship. When one owner dies, the asset automatically transfers to the surviving owner(s) without going through probate.
Tenancy by the entirety. Offered in some states for married couples, this version of joint ownership includes survivorship rights and may offer protection from creditors of one spouse.
Tenants-in-common. Each person owns a defined share. When one owner dies, their share goes into their estate and is distributed through probate — often a surprise to families expecting a simpler process.

Trusts: Powerful and precise tools

Titling assets in a trust can help bypass probate and ensure privacy and control. Because a trust doesn’t “die,” a successor trustee can step in seamlessly when the grantor passes away or becomes incapacitated and distribute assets according to the trust’s terms.

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For this to work, however, you must formally retitle the assets into the trust’s name (preferably before you die). If you don’t, those assets may still have to go through probate to get into the trust.

Irrevocable trusts can also remove assets from your taxable estate and provide protection from creditors — but again, only if everything is properly structured and titled.

Choosing the right trustee is another key decision. This person (or institution) is responsible for managing and distributing the trust’s assets and must act in the best interest of the beneficiaries.

Your trust documents should also outline a clear process for removing and replacing trustees if needed.

The bottom line

Proper titling and up-to-date beneficiary designations are just as important as having a will or trust. Think of them as the engine under the hood of your estate plan. A little maintenance now can save your loved ones from unnecessary costs, delays and disputes down the line.

In our next article, we will focus on why it is important to review your financial power of attorney and health care power of attorney to make sure they still align with your current wishes and life circumstances.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Denise is a Director at Hirtle Callaghan with responsibility for leading family relationships from our Arizona office. Denise brings over 26 years of her legal and financial experience working with multigenerational client families on all aspects of their financial lives. Denise draws on her past experiences to help clients develop and implement their wealth transfer plans and makes recommendations about wealth transfer and tax-saving strategies.