For many families, death and money are two of the most uncomfortable topics to discuss. Combine those two topics, and end of life financial planning can be uncomfortable to talk about.
Numerous studies back this up, including a 2019 survey by Lincoln Financial that found nearly half of all Americans have a hard time talking about personal finance with family members.
So it should be no surprise that when a loved one dies, lack of communication is a primary reason for family arguments over the estate. Aside from damaging family relationships, these fights can lead to lengthy and costly legal battles. The good news is that those outcomes are preventable.
Our Trust Point team is well versed in estate administration, having worked as a trustee or personal representative for many families. From our experience, the best way to make sure your estate transitions smoothly and without family conflict is to plan ahead and set clear expectations with your beneficiaries. Consider these steps and remember, we are ready to help you at any stage of the process.
Have Your Documents in Place
No estate plan can exist without the proper documentation in place. We won’t take a deep dive into everything here, but a few key documents you need to have in order include:
- Financial power of attorney, which allows a loved one to make financial decisions for you if you are incapacitated. This terminates at death.
- A health care directive or living will, which allows a loved one to make medical decisions if you are unable.
- A will or trust with clearly listed beneficiaries and terms.
Wills and living trusts are the most common estate planning tools and should be drafted in consultation with a licensed and reputable attorney. A key difference between the two is that a will requires validation through probate court, whereas a trust does not. Another important distinction is that a will takes effect at death, whereas a living trust can be funded and administered immediately.
Wills are administered by a personal representative or “executor” named in the document and approved by the probate court. Trusts are administered by a trustee(s) appointed in the trust document. Trust Point can serve families in either capacity, which is often beneficial as we are a third party without a vested interest.
Start the conversation early, continue it often, make sure there are no surprises, and you should be in good shape for a smooth estate transition
Get Support from a Financial Professional
If you’re using a third-party facilitator like Trust Point to handle your estate, set up a meeting to walk through your will or trust to determine whether it works the way you want. Clients often have a vision for how their estate will be distributed, but it doesn’t always match the document. A meeting is also a great opportunity to ask questions about the distribution of assets.
Also keep in mind that your assets will change over time. Maybe you have sold a business or gained some new real estate or personal property. Your will or trust may need to be updated to incorporate those changes, which should again be reviewed with your facilitator to quarterback the conversation with your attorney.
Notify Beneficiaries
Once your intentions for your estate are documented and you understand how your plan will work, it’s important to meet with your beneficiaries to share your plans. Family feuds often arise when sibling expectations aren’t met upon a parent’s death. Do your children expect an even split of assets? Do each of them expect to get the house, the family business, or cherished possessions? Keeping your will a surprise means each beneficiary has different expectations, which typically does not end well.
Ease into the conversation by saying you’re developing an estate plan and there are some things you’d like to see happen when you’re gone. You might also ask them what they think is going to happen, as a way to begin the discussion. Or sometimes sending a written letter to beneficiaries is a good way to kick off the conversation. The talk doesn’t need to happen in one sitting, nor does the initial discussion need to involve dollar amounts. You know your family best — just be sure to get the discussion started and continue it until everyone is on the same page.
Though it can feel awkward, it’s best to have all of your beneficiaries (and sometimes other family members who might expect to be beneficiaries) in the same room for estate planning discussions. Even if your comments are identical, family members tend to hear different things in individual conversations, which could lead to arguments later.
Did you know? The Baby Boomer generation, born between 1944 and 1964, is expected to transfer more than $30 trillion in wealth during the next few decades.
Introduce Your Facilitator
It can also be a good idea to introduce your beneficiaries to your facilitator and even schedule a meeting to talk through your estate plan as a group. At Trust Point, we are happy to meet with our clients’ family members to explain our role and how estates are administered. Developing that relationship after a client’s death can prove challenging, especially in situations where beneficiaries are unaware of assets staying in trust, or of our role as trustee or personal representative.
The Top 5 Beneficiary Designation Mistakes
1. Not naming a beneficiary or naming your estate as beneficiary
Naming your estate when you complete the beneficiary designation for the funds in your retirement plan—or not completing the designation at all—most likely will result in the assets being pulled into a probate estate settlement. The drawbacks are many:
- Probate often is a slow and costly way to distribute assets.
- State statutes, not you, determine who receives the plan’s assets.
- Assets from the plan can be used to pay your estate’s creditors.
- There is a greatly reduced chance that the opportunity for tax-free or tax-deferred growth will pass along to your intended beneficiaries
2. Not keeping beneficiary designations up to date
It is essential to revisit your beneficiary designations, especially in connection with life-changing events such as marriage or divorce. The most imperative situation may be divorce. If you don’t complete an updated beneficiary designation, and you originally named your former spouse as the beneficiary, that former spouse will receive your plan assets upon your death.
Regardless of whether your designation is updated at the time of marriage, your spouse is deemed your primary beneficiary by law. Ordinarily, this is the desired outcome. But if it is not what you want ,due to other estate-planning considerations, your designation must be updated to name a different beneficiary, and your spouse must acknowledge agreement by signing the beneficiary designation.
3. Failing to name contingent beneficiaries
Generally, a primary beneficiary is named at the time the retirement plan is started. But what happens if your primary beneficiary predeceases you, or if you pass simultaneously? Unless a contingent beneficiary is named, the result is the same as if you had designated no beneficiary at all (see #1 above).
4. Naming minors as beneficiaries
Much time and effort often are put into estate plans to establish trusts or to name guardians who can manage the finances of minors who stand to inherit substantial assets. Similar care should be taken when a minor is named as the primary or contingent beneficiary of a retirement plan or IRA.
You also may want to consider additional oversight for young-adult beneficiaries. Is your 22-year-old son equipped to manage the assets and make appropriate long-term planning decisions? Remember that at the time of your passing, your IRA fully vests in the beneficiaries. They can use the assets for further education, a first-time home purchase—or to underwrite an unforgettable Spring Break excursion for 20 of their closest friends.
5. Failing to coordinate estate-planning documents and beneficiary designations
Beneficiary designations for retirement accounts are an extension of your overall estate plan. It is important to review them in conjunction with each other to make sure the outcomes will work as you intended. For example, it probably would occur to you to update your will or revocable trust to make sure that assets covered by those documents provide for your spouse and equally for your three children. But suppose you forget to update the beneficiary designation for your retirement plan, which was completed after your marriage but before your children arrived? It names your spouse as the primary beneficiary and your cousin Jack as the contingent beneficiary. If your spouse should predecease you, do you really want your plan to pass to cousin Jack and not your children?
Plan Today for a Smooth Estate Transition
Estate planning can be a challenging task, especially when striving for equality among family members. But remember, fair isn’t always equal. It’s your estate and you can distribute it as you see fit. You can even decide to sell certain assets or make a donation to charity. Whatever you decide, be prepared to share your plan with your family. Start the conversation early, continue it often, make sure there are no surprises, and you should be in good shape for a smooth estate transition.
See what trust services we provide to help you feel more confident in yours and your loved one’s financial security.
