The Seven Habits of Highly Effective People by Stephen Covey was written over 15 years ago but is still a best seller for good reason. His timeless advice is applicable across many aspects of our lives, business or personal.
One of his recommended seven habits is to begin with the end in mind. I couldn’t agree more, especially when it comes to personal finance and especially as it relates to titling our assets.
I may sound like a broken record on this topic, and I hope you are not so tired of my soapbox on this matter, but it’s an extremely important part of your planning.
Even if you don’t have estate planning documents in place (60% of Americans die without them) or your documents are outdated (best to review them every 3-5 years), the correct account titling and beneficiary designations alone can save your assets from probate, delay, unnecessary costs, and going to someone you didn’t intend.
The best starting point for looking at your situation is to see what homework you have. To start, you need to make a list of your bank accounts, life insurance policies, annuity contracts, non-retirement and retirement investment accounts, and property that you own.
I have found that list to be so important now and in the future that I designed one (that does the math for you) to easily capture it all in one place, including the titling/beneficiary details, My Net Worth Summary.
Once you have written a list of assets, look at the detail. This is when you “begin with the end in mind.” Ideally, your estate planning attorney should go through this list with you to recommend titling and beneficiary designations.
Does the title of your savings account, for example, tell the bank where you want that account to go after you are gone? If it is not a Joint with Rights of Survivorship account or a trust account, have you added a POD (Payable on Death) designation?
POD is only naming a beneficiary upon death, not giving any authority to use funds right now. A beneficiary designation on any account, non-retirement or retirement, bypasses probate so no delay and no cost to get it to where you wanted it to land.
A similar option to a POD is also available for non-retirement investment accounts and property. If those assets are not titled as Joint with Rights of Survivorship or a trust, you can add a TOD (Transfer on Death) designation in order to bypass probate.
This is especially important if you own property in another state outside of your residence. Otherwise, your property may end up going through probate in two states, the state of your residence and the state of its location. Again, consulting your estate planning attorney is the best resource for getting recommendations on your specific situation.
Then on retirement accounts, annuity contracts, and life insurance policies, you want to be sure your beneficiary designations match what you said you wanted to happen in your estate planning documents. Generally, naming both a primary and a contingent beneficiary (or multiple beneficiaries) is a good practice.
If you have an IRA, for example, and name your spouse as primary beneficiary but are both killed in a car accident together, then who would you want to receive that account? The contingent beneficiary designation on that IRA would apply in that case.
The importance of getting your beneficiaries correct really hits home when you realize that a beneficiary designation is like a mini-will on each account. I can’t tell you how many times I have had people tell me “I am not sure how my beneficiaries are listed on each account, that was so long ago I can’t remember. But it doesn’t matter since I have it all spelled out in my will/trust.” Wrong, wrong, wrong!
The bank, insurance company, investment firm, or whoever the custodian is that’s holding the account will NOT consult your will/trust (unless you listed your estate or trust directly as your beneficiary, which may not be the best advice). They will distribute to whoever is listed as the beneficiary on that account, period.
Because beneficiary designations act as mini-wills, a recent widow watched her deceased husband’s 401(k) go to his brother. For the same reason, one adult child received an IRA (and owed all the taxes on it at her tax bracket) with the deceased parent’s assumption that she would then distribute it “fairly” to her siblings.
With the right beneficiary designations, unnecessary probate, often a one year or more process, is avoidable.
Beginning with the end in mind, ask yourself where you want each asset to go in the end. It is truly an exercise that will save your family much misunderstanding, time, and cost in the end. Check out my free chapter on this exact topic.
This is a way to express your wishes now in writing for clear distribution later. You worked hard for what you have, so put some time into assuring the final landing spot for the fruits of your labor!
Have you had experiences related to titling and beneficiaries that can help others in our community? What have you found helpful to address this topic? Please share your thoughts.