Understanding Estate Planning Designations - dummies

Understanding Estate Planning Designations

Estate planning provides for the efficient and effective transfer of assets at your death. You may have heard of terms like joint tenants and beneficiary designations; read on to discover what these estate planning strategies mean.

  • Joint tenants with right of survivorship: The average American owns a home with a spouse, and the house is registered in joint tenancy with right of survivorship. They may also own personal investments, such as brokerage or mutual fund accounts titled with their spouse as joint tenants with rights of survivorship. This ownership type allows you to co-own assets with another person, and when one of the two dies, the asset transfers completely over to the survivor automatically, avoiding probate.

  • Beneficiary designations: You may have a retirement plan at work, life insurance, and possibly an IRA account or two, all of which have beneficiary designations. A beneficiary designation instructs the retirement plan sponsor, investment account custodian, or insurance company as to who is to receive the assets upon your death. Assets and insurance policies with beneficiary designations also avoid probate.

  • A will: A will is a legal document that allows you to dictate in writing what you want to happen with your assets and who will care for your dependents upon your death. You can obtain a will from an attorney who specializes in estate planning, with off-the-shelf software programs, or from online resources like Nolo.com. A will becomes effective through the probate court process.

All assets that transfer by title or beneficiary designation upon death avoid probate. Probate is the legal process of settling an estate, and it can be expensive and time-consuming. You can reduce probate fees and potentially save time by having as many assets as possible pass to your heirs through joint tenancy with rights of survivorship and by using beneficiary designations as much as possible. All other assets that don’t transfer by title or beneficiary designation, such as personal property, vehicles, and your baseball card collection, need to be addressed in your will.

The most critical (but not the only) reason why you need a will is to name the guardians for your minor children, presuming that you have minor children. Not only do you want to consider who should take care of your children, but also who should take care of the money for your children until they reach adulthood. You don’t want to leave this issue for the state to decide.

The best caregivers aren’t necessarily the best money managers, so consider who would be the best caregivers and who would be the best money managers for the assets you leave in trust to your children.

Many people die without having executed a will. In that case, your state of residence dictates how your assets will be distributed and who would be responsible for caring for your minor children. Don’t take chances; if you don’t have a will, get one immediately!