Simple Estate Planning – Your Assets When You Die

WIl, Beneficiary, IRA

Planning for who will inherit your assets

Guess what? You are going to die.  And no, it’s not because “I know what you did last summer”…

I find it interesting to broach this topic with clients.  Some clients open up and share their deepest fears, thoughts and emotions. And others, well they clam up and become visibly uncomfortable.

Regardless of how you or I feel about death, it’s critical that every financial plan address the issue.  A financial plan needs to address who will receive your assets after you die (if you don’t address it, the state will).

It’s a common misunderstanding that your will dictates who will inherit your assets. While the will can play an important part in distributing your assets, it’s the last in line.

Distribution of your assets follows a set order.  Generally, assets are distributed as follows:

  1. First – Assets will pass via account ownership
  2. Second – Assets will pass via beneficiary designations
  3. Third – Whatever is left is passed via your will.

A good estate plan will try to pass as many assets in step 1 and 2 as possible.  Step 3, the will, is a last ditch effort to distribute everything else.

Let’s take a deeper look.

Step 1 – Account Titling or Ownership

The first step to distributing deceased person’s assets is account ownership.  Most common is a joint account between spouses.  A house, a bank account, and an investment account are all common things that are owned jointly by spouses.

Assets that are owned jointly simply need to be re-titled when one of the owners dies.

It’s important to know there are different types of joint ownership, and each may have a different impact on an estate plan.  Most common is joint with rights of survivorship.

Step 2 – Beneficiary Designations

Accounts such as your 401(k), your IRA, and your life insurance have beneficiaries.  Accounts with beneficiaries pass to the next generation before your will comes into effect.  Your will has zero effect on how these assets pass (unless you choose to name the estate as a beneficiary.  It’s beyond the scope of this article, but this is generally not a good idea).

Why am I addressing beneficiaries?

Because you need to be extremely aware of whom you named as your beneficiaries.  And you should know for each account you have.

When our lives change (i.e. divorce, marriage, and the birth of a child), updating beneficiaries tends to be forgotten.  Not something you want to let happen.  If you get this wrong, your hard earned asset is going to go to the wrong person.  And your beneficiaries will have little recourse.

There are several advantages your beneficiary receives when inheriting an asset via a beneficiary designation as opposed to through the will.

  1. It can happen quickly – A beneficiary can swiftly receive the asset on which they are the named beneficiary.
  2. It avoids probate – Probate is the process of distributing deceased person’s assets that do not pass via beneficiary designation (or some other process). Probate may be long, expensive, and public.  It’s better to avoid probate whenever possible.
  3. It’s cheap – Probate often costs money. Assets passed by beneficiary are easy to re-title.  All else being equal, it is likely going to be less expensive (if it cost anything at all).

Often the goal will be to have your beneficiary designations match the terms of your will.  But it’s up to you to ensure it does.

Step 3 – The Will

Your will is responsible for distributing the remainder of your assets, the possessions that did not get distributed by the other methods discussed above.

A term used to describe the process of distributing assets via a will is “probate.”  Probate is the legal process that means collecting the deceased person’s assets and distributing them appropriately as per the terms of the will.

Why does this all matter?

At the end of the day, your beneficiaries are the ones sorting out your estate when you die.  And for many we may be discussing a substantial amount of assets.  Your job should be to create certainty for them.  Having a well laid out plan increases the likelihood your beneficiaries will accept your instructions and distribute the assets accordingly.  Not leaving your beneficiaries with a set financial plan can lend to family disputes, additional stress, and unnecessary bitterness towards the deceased. (And who doesn’t want to be remembered in all their glory? Not their missteps!)

The goal of a good estate plan is to strategically title your accounts, update your beneficiaries, and establish a will all leading to certainty in how your assets will be handled after you are no longer around.

None of the information in this document should be considered legal advice.  You should consult your legal advisor for information concerning your individual situation.


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2 Responses to Simple Estate Planning – Your Assets When You Die

  1. Emmett Hughes January 2, 2015 at 12:53 pm #

    Great stuff Dan. Was spooked by the title but read on and now have a better understanding of the process. Great way to explain an otherwise difficult subject to talk about.


    • Daniel Zajac, CFP®, AIF®, CLU® January 2, 2015 at 1:10 pm #

      Hi Emmett

      I agree. The word “die” is such a harsh word isn’t it! I listened to a expert in the conversation of death a few years ago who suggested not to use a euphemism for the word. But for some reason it still feels awkward.

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