If you set up the proper will or trust, you have the basics of a very strong estate plan. But without one or both of these tools, you are really courting financial disaster. Having said that, it’s important to understand that not every asset is controlled by your will and/or trust. In fact, most are not. If you name a beneficiary for an account, that person will get that particular asset when you are gone and it doesn’t matter what your trust or will says. The beneficiary designation is the only thing that counts in those cases. And in other cases, you have to be very direct if you want to cut someone out of your will or trust.
This is really important for you to understand. But some folks don’t quite get this. They think that if they have a living trust or will the can ignore their beneficiary selections and everything will be OK. That’s a monumental error because the wrong people may end up with those assets if you don’t play the beneficiary designation game smart. Sometimes, it’s the lawyers. Yuk.
Here is a short list of investments that do have beneficiary designations and may pass outside of your trust or will as a result:
- Retirement Accounts
- Life Insurance
- Assets Held as Joint Tenant
What You Should Do Now
The first thing to do is make sure everything you own is titled correctly. Retirement accounts can’t be moved into your trust, but other assets can be. This is a subject far beyond the scope of this post. I strongly encourage you to speak with an attorney to make sure all your assets are set up properly.
Next, make sure you filled out the beneficiary designation form correctly. While you are at it, confirm that you still want your named beneficiaries to receive the asset. If not, update the beneficiary designation. It’s as simple as sending in a new form.
What You Should Do Later
Big life events might mean it’s time to review your trust, will and beneficiary designations. Such events include:
- Business Purchases and Sales
- Asset Purchases and Sales
Even if nothing changes in your life, laws change over time. It’s a good idea to review all these important documents and elections at least once every five years.
Do You Still Need A Trust or Will?
As I said above, most of your assets might have either joint owners or beneficiaries. That means you don’t need a trust or will to pass those particular assets. The type of ownership or the beneficiary form does it for you.
Regardless, you might still need a trust and/or will for several reasons. First, many people forget to name a beneficiary when they buy a new asset. In those cases, the trust or will might come to the rescue.
Second, while many assets do allow you to name a beneficiary, not every asset does. Those include some collectibles, tangible assets like gold coins or bars and personal effects to name a few. In those cases, spelling out who should get what asset can save a lot of arguments by the heirs.
Third, a trust and other estate planning tools do a lot more than just name beneficiaries. They also include health powers of attorney for example. Of course you can create those other estate planning documents without creating a trust or will but why take a chance? It’s smart to have the proper estate planning documents in place regardless.
Not all your assets are covered by your trust and/or will. But as you can see, your beneficiary designations are at least as important as these documents if not more so.
Have you reviewed your beneficiary designations lately? Were you surprised by what you discovered? Did you make any changes afterwards?