What’s in the title? Advisors say there’s a lot more to people than they realize when it comes to estate planning.
Less than half of Americans have any estate planning documents — and of those who have a will or trust, 14% have never updated it and another 13% only update every 10 or more years, according to Trusts & Wills. This means more than a quarter of people with existing plans likely have outdated beneficiary designations.
Beneficiaries are people you name to receive your property after you die. Naming beneficiaries and properly titling accounts is one of the most common estate planning gaps, advisors said. Title shows how property is owned and controlled during life – jointly with someone else, individually, or in a trust, for example – and, like named beneficiaries, can determine who receives the property after death.
Both beneficiary designations and titles can leave an asset out of probate and will. So how ownership of an account or property is held or passed on to heirs can override what is stated in the estate documents. Neglecting these details can have ramifications for probate – a potentially lengthy, expensive and publicly court-monitored process for settling an estate – as well as taxes and the people you want to receive your assets.
“That’s the number one thing that gets missed in trying to make sure that the estate plan is delivered the way people want it,” said Shannon Stevens, managing director and head office of Hightower Signature Wealth. “It is very, very important to make sure you understand the implications of how the property is titled.”
How can improper title or beneficiary designations cause harm?
Incorrect or missing beneficiary designations and improper title can lead to delays in distributions, misdirected assets and additional costs, advisors said. Here are some examples:
- Not updating beneficiaries can mean that the person you did not intend to receive your assets may inherit them. For example, a former spouse may inherit property instead of the current spouse because the beneficiary designation was not updated after the new marriage.
- Not naming any beneficiaries forces your estate through probate, delaying distributions and incurring unnecessary legal fees.
- Listing a minor as the primary beneficiary requires the appointment of a court-appointed guardian – because minors cannot legally manage assets – which means delays and administrative costs.
- A bank account that is not titled “Joint Tenants with Right of Survivorship” (JTWROS) and has no named beneficiary will likely pass through probate, which could temporarily leave the surviving spouse without access to the funds.
- An investment account called JTWROS with the other spouse will automatically go to that spouse — potentially overriding the will that intended the account to go to children from a prior marriage. “We see this frequently,” said Anthony Fitzy, wealth strategies executive at Bank of America Private Bank. “It can go beyond estate planning.”
Does a will determine who gets what?
A will dictates how your assets are distributed, but assets that rely solely on a will usually have to go through probate, advisors said.
“The goal is to name everything you possibly can, and hopefully willpower is just a supporting piece that plays a supporting role in extreme situations,” Stevens said.
The best approach: Properly title accounts and name beneficiaries on all major assets — homes, retirement and investment accounts — and let the will capture anything that’s overlooked or less valuable, such as an everyday car or household items, Fitzi said.
A will is also necessary when an heir is a minor. Minors can inherit property but cannot legally manage large sums of money and will need a guardian. A will allows you to appoint the right person; Without this, the court will appoint a guardian, a potentially lengthy and expensive process.
“So, vetting is important so that you can appoint the right people – people you know and trust,” Fitizzi said.
How should you title and designate beneficiaries?
Advisors said the right approach depends on how you want your wealth to flow. Start with the basics: wills and health care and financial powers of attorney.
If you have more complex assets – real estate, business interests, or valuable collections – and want to avoid probate by keeping your assets private, also consider a living trust. A revocable trust keeps any assets you put into it; You retain control while you’re alive, and it contains specific instructions for distributing them outside of probate after death, Stevens said.
From there, review how each asset passes at death – through or outside of probate – and to whom, depending on how it is titled and who is named as the beneficiary.
For example: JTWROS assets automatically go to the joint owner, and assets with a named beneficiary go to the named individual – both outside of probate. However, individually owned property without a named beneficiary, or property titled as tenancy in common, must go through probate and follow the will.
“Look at the ownership gap and figure out your situation,” Stevens said. “Do you like the result or not? If not, change it.”
Once a baseline is established, Stevens recommends revisiting and updating your designations after every major life event — such as a divorce or marriage — or at least every year or two, even when nothing significant has changed.
Medora Lee covers money, markets and personal finance for USA TODAY.