Most people know they should have a will. Fewer people realize that some of their largest assets may never pass through their will.
Review Beneficiary Designations Regularly
Many financial accounts pass directly to the beneficiary you’ve named with the financial institution, regardless of what your will says. This commonly includes retirement accounts, life insurance policies, and accounts with beneficiary or Transfer on Death (TOD) designations.
Beneficiary designations are often completed when an account is opened and are never revisited. Years later, family circumstances may be very different. Taking a few minutes to review these forms every few years can help avoid unintended results.
Understand How Different Assets Are Taxed
Just as important as who receives your assets is which assets they receive. Not all assets are taxed the same, and thoughtful planning may help your heirs receive more of your estate.
A good estate plan doesn’t just answer the question of who receives your assets. It also considers which assets each beneficiary should receive. For example, if charitable giving is part of your estate plan, it may make sense to leave a portion of your traditional IRA to charity. Because qualified charities generally do not pay income tax, they can receive those assets without the tax burden that often applies to individual beneficiaries.
Create a Tax-Efficient Legacy Plan
On the other hand, taxable investment accounts may be better assets to leave to family members. In many cases, these accounts receive a step-up in basis to the market value at death. This step-up can significantly reduce or even eliminate capital gains tax if your heirs later sell the investments. Coordinating your beneficiary designations with your estate and tax plan can help preserve more of your wealth for both your family and the charitable organizations you support. The goal isn’t simply to decide who receives your assets. It’s to make sure the right assets go to the right beneficiaries in the most tax-efficient manner possible.
Bottom Line
Reviewing your beneficiary designations and coordinating them with your overall estate and tax plan can help ensure your wishes are carried out while preserving more of your wealth for the people and causes you care about.
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