Defining a legacy
It's never too early to think about estate planning. By putting guardrails in place now, it will be you deciding what happens to your current and future assets, not the courts.
Take a minute to consider the following:
- Who would take care of your minor children if something happened to you?
- Who would you want to be making medical, legal and financial decisions for you if
you were unable? - If you own a business, who would take charge if you became incapacitated or died?
And would your family be able to get fair market value for your equity? - Who would you want to receive your assets at your death?
- And what do you envision your wealth legacy to be?
With a lifetime ahead of you, it may seem as though estate planning is near the bottom of your financial ‘to do’ list. But if you don’t take time to think about your legacy and put a few guardrails in place, what happens to your current and future assets will be decided by the courts rather than you.
Need more convincing? Check out the Why You Need an Estate Plan article for more insights.
Four essential documents
At a minimum, you should sit down with an estate planning attorney to draft the following four important estate planning documents:
Will
Directs the distribution of your assets; names a guardian for any minor children; proscribes how and when your beneficiaries are to receive their inheritance; and names an executor for your estate
Durable Power of Attorney
Names an individual to act on your behalf (if needed) in legal and financial matters (for example, filing tax returns, accessing accounts, paying bills) if you became incapacitated.
Healthcare Proxy
An advanced medical directive that appoints someone to make medical decisions on your behalf if you’re incapacitated.
Living Will
Defines your exact wishes regarding what types of end-of-life medical treatments you do or do not want undertaken on your behalf.
Periodic reviews
Make sure you review your estate plan documents:
- At least every 3-5 years
- Whenever there is a significant change in your family or financial situation
- When tax laws change
Other documents
In addition to your will, other documents may serve to direct the transfer of your assets:
Titled Assets
Any property you own as ‘joint tenants with rights of survivorship’ will automatically go to the other owner on the title.
Beneficiary Designations
Several large assets (such as life insurance proceeds, IRAs, 401(k) plans and annuities) transfer based on the named beneficiary rather than your will. So make sure to keep beneficiary designations current as your job or family situation changes.
Trust Documents
Control the disposition of all assets held in the trust; regardless of any stipulations in your will. Check out the Understanding Trusts page for more information about various trusts.
Prenuptial Agreements
May also define what assets a surviving spouse should receive upon your death. This document should be carefully coordinated with your estate plan to avoid conflict.
The goal is to make things as easy as you can on your loved ones by indicating how (and to whom) you wish to leave all your assets — and having as many of those assets as possible pass outside of the probate process by naming beneficiaries.
Naming beneficiaries
Beneficiary designations specifically name who will inherit a particular asset — without the need for probate. Typically, you name one or more primary as well as contingent beneficiaries. The contingent beneficiaries are merely ‘backups’ in case the primary beneficiary is unable or unwilling to accept the asset. You can name multiple beneficiaries for several types of accounts including:
- Bank and brokerage accounts (such as pay or transfer on-death accounts)
- Retirement accounts like IRAs, 401(k)s and Roth 401(k)s
- Compensation plans like stock options and bonus plans
- Life insurance policies you own and those provided by your employer
- Annuities with death benefit riders
Why asset titling is important
The way you title property you own determines whether your will, revocable trust or the titling itself controls the distribution of the asset. So, anytime you make a large purchase or enter into a business arrangement, carefully consider the titling of the asset.
Joint Tenants with Right of Survivorship
Property is owned by two or more owners. When the first owner dies, the property passes directly to the surviving owner(s).
Tenants in Common
You own part of the asset, while others own parts. You control the disposition of your portion and they control theirs. So your interest passes according to your will or revocable living trust.
Tenants-By-Entirety
Spouses own and must act together in making decisions about the property. For asset protection purposes, in most states your interest passes directly to your surviving spouse.
Revocable Living Trust
Allows you to avoid probate on any assets that are titled to the trust during your lifetime. The terms of the trust dictate how the assets will transfer following your death.
Community Property
Each spouse owns half of the asset and is able to dispose of it as they like under a will or revocable living trust. (Only available in certain states.)
Sole or Separate Property
Assets that you own individually, in which your spouse has no ownership interest. Distribution at your death will be controlled by your will or revocable living trust.
Getting Started
Your situation today may be pretty straightforward, but it can quickly become more complicated as you build wealth, expand your family and accumulate assets. Here are a few simple steps to get you started:
- Determine your net worth
- Use the Net Worth Statement Worksheet to identify each of your assets. Think about who you want the beneficiary (or beneficiaries) to be for each and note how each asset is titled.
- Review existing agreements
- Carefully read any prenuptial agreements or divorce decrees to determine your potential benefits and obligations.
- Review business and investment restrictions
- Determine what restrictions (if any) apply to your interests in the entities, and what terms govern the disposition of your interest.
- Review beneficiary designations
- Examine all life insurance policies, retirement accounts and annuities to confirm the named beneficiaries and decide if they still reflect your wishes.
- Meet with your advisor team
- Bring all of this information with you when you meet with your team so they can help you prepare to meet with your estate planning attorney and other advisors.
Related Insights
Understanding your trust
What every beneficiary needs to know
Key takeaways
- Trusts provide a way to protect your assets and involve three key parties: the grantor (creator), the trustee (manager) and the beneficiary (recipient).
- Trusts can be created for a number of valuable reasons. They can be used to facilitate gifting to minors, provide income and estate tax planning benefits, and protect assets from creditors.
- Beneficiaries should learn the different types of distributions. Distributions can be of principal (the original assets) or income (earnings from investments). They can also be either mandatory (scheduled) or discretionary (at the trustee's discretion, often for specific purposes like health or education).
- Knowledge is power, so beneficiaries should carefully read the trust document, request regular updates on investments and ask questions of your trustee.
- Beneficiaries should also seek out professional advice from their tax advisor, attorney and financial advisor to fully understand how the trust will operate and impact their financial life.
Wealthy parents often rely on trusts, not as a way to micromanage their children’s inheritances, but as a way to ensure that those assets are protected from creditors and/or a possible future divorce. With trust assets, your inheritance is managed by a trustee (usually an investment advisor, trust company, attorney, or trusted friend or family member) who is responsible for overseeing the investment and distribution of assets according to the provisions of the trust.
$106 trillion
More than $106 trillion is set to change hands from Baby Boomer parents to their Gen X, Millennial and Gen Z children between now and 2048.1
There are three legal parties involved with every trust:
The Grantor
The person who creates and funds the trust
The Trustee
The individual or organization that manages the trust and assumes responsibility for overseeing trust administration and making distributions to the trust’s beneficiary(ies)
The Beneficiary(ies)
The individual(s) who receive distributions from the trust assets according to the provisions of the trust and/or upon the grantor’s death
Why a trust?
Trusts can be created for a wide range of reasons and purposes, but generally those created for family members tend to fall into three common categories:
Note: Even though you may legally be an adult, your trustee and all beneficiaries are still bound by the terms of the trust document. If it is structured to last for a specific period of time (perhaps even your lifetime), it’s likely that neither you nor the trustee will be able to force the trust to terminate early.
The trustee role
A trustee’s role might initially seem a bit confusing. Whose interests do they actually represent? How do they make various investment and distribution decisions? And who watches over them?
Every trust is controlled by a trust document that describes the purpose of the trust and exactly how it will be administered. Typically, it:
- Names the grantor, trustee and beneficiaries
- Identifies the assets included in the trust
- Outlines the trustee’s powers and responsibilities
- Explains how and when the trust assets will be distributed to beneficiaries
- Specifies the circumstances around when and how the trust will terminate
The trustee is the individual (or institution) who holds legal title to the trust property and agrees to perform certain duties on behalf of the trust beneficiaries. The trustee should therefore have a clear understanding of the specific terms of the trust, but also must be mindful of the duties that govern how they carry out their obligations.
Additionally, in order to administer a trust effectively, trustees need to be able to balance the wishes of the grantor and gain the expertise required to administer the trust effectively.
A fiduciary duty
The trustee (whether an individual or a corporation such as Bank of America) has a fiduciary duty to ALL of the trust’s beneficiaries—current and future — and must follow all the terms of the trust without being influenced by others. The trustee:
- Must be independent and objective in its actions with respect to both current and future beneficiaries. They cannot make decisions favoring you at the expense of future beneficiaries.
- Has many responsibilities, including handling beneficiary distribution requests, making investment and tax decisions, maintaining all of the trusts records and filing all required tax returns.
- Should sit down with beneficiaries periodically to answer any questions you have about your trust and should help coordinate your overall financial planning with your expected trust distributions.
The fiduciary duties of a trustee fall into three broad categories. Each should guide the trustee’s day-to-day trust administrative actions.
Duty of loyalty
The trustee must administer the trust solely in the beneficiaries’ interest — avoiding any conflicts of interest.
Duty of skill and care
The trustee must exercise prudence; administering the trust with reasonable skill, care and caution while adhering to the trust’s terms and purposes, as well as the interests of beneficiaries.
Duty of impartiality
If there are multiple beneficiaries, the trustee must be mindful of their respective interests and must act impartially whenever investing, managing and/or distributing the trust property.
Trustees are also required to invest the trust assets in a diversified manner — analyzing and making investment decisions in consideration of the risk tolerances of beneficiaries and incurring only reasonable expenses. Other duties include:
- Distributing trust notices
- Regularly communicating with beneficiaries
- Handling the accounting and reporting for all trust investment and activity
- Keeping the trust property segregated from other property
- Enforcing and defending any claims of the trust
- Maintaining confidentiality relating to the trust
Keep in mind that balancing these obligations and determining which actions are and aren’t permissible can involve a lot of complexity and requires a clear understanding of trust administration rules.
How trust distributions work
As a trust beneficiary, you need to know whether you have access to either principal or income, or both. The trust document will outline which beneficiaries can receive income and principal distributions, the timing of those distributions and the purposes for which a distribution can be received.
Mandatory and discretionary distributions
Distributions fall into two broad categories: mandatory and discretionary. With mandatory distributions, the trust directs that net income or principal must be distributed at certain points in time:
- In some cases, net income distributions begin automatically when you reach a certain age and continue annually (or more frequently) until the trust terminates or you no longer have an interest in the trust.
- Trust principal may be automatically distributed to you (or become available for withdrawal) when you reach specific ages. For example, half the principal may become available upon request once you reach age 35, with the balance becoming available at age 50.
If distributions are not mandatory, you will need to request distributions from the trustee who may have discretion to make income and principal distributions to you based on the standard provided by the trust agreement:
- A trustee who is also a beneficiary or related to the beneficiary will be limited to distributions based on an “ascertainable standard” that includes health, education, maintenance and support.
- An “independent” trustee, who cannot be related to the beneficiary, may be granted a more liberal distribution standard.
- Sometimes the trust will allow for certain principal distributions based on life events (e.g., paying for a wedding, making a down payment on a home or starting a business).
- Some trusts also include a withdrawal power, which permits a beneficiary to request the distribution of a certain percentage of the trust assets each year.
Trustees may be required to consider your other available financial resources before approving a distribution. You may need to provide a budget, personal financial statement, income tax returns or other documentation to support your distribution request.
Meeting with your trustee
If you’re the beneficiary of an irrevocable trust that was created by a family member to provide you with financial resources and security, the following are a few questions you may want to ask your trustee to better understand the terms, benefits and options relating to your trust:
- Does the trust require periodic income distributions? If so, how frequently?
- Does the trust include distributions of principal at certain ages or upon other milestones?
- Can I request additional discretionary distributions?
- Can trust assets be used for specific purposes (e.g., buy a home, start a business, fund an education)?
- Does the trust terminate at a particular time? If so, who receives the remaining trust assets?
You should also take time to learn how the trust assets will be invested. Distributions of trust income are made up of interest, dividends, rents, royalties, etc. that may be taxable, so ask:
- Which of the payments I receive will be taxable to me?
- What’s the investment objective for the trust portfolio?
- What investments are being held in the trust and how/why were they chosen?
- How much income is expected to be produced by the portfolio?
Find out whether you have some control over the ultimate distribution of the trust (either during your lifetime or through your estate). A few good questions to ask:
- Do I have any control over the ultimate distribution of this trust?
- What happens to any remaining trust assets when I pass?
- What does it mean to have power of appointment?
- Is that power in any way limited in its scope?
Finally, inquire as to whether you’ll have the opportunity to become a co-trustee or the sole trustee of your trust, and if so, ask:
- When I become a trustee, what duties will I have and how can I best prepare myself for that future role?
Trust beneficiary FAQs
The following are some of the trust-related questions we most frequently hear from beneficiaries.
Take control of your financial future
When’s the best time to sit down and discuss your trust? Ideally, as soon as you find out about its existence.
- Make sure you meet regularly with your trustee.
- Obtain a copy of the trust document for your files.
- Carefully review the trust account and investment statements you regularly receive.
- Talk to both your tax advisor and attorney about the specifics of the trust, and sit down with your financial advisor to discuss how the trust affects your plan.
Knowing that you’ll have access to a sizeable inheritance at some point in the future can open up a world of new planning opportunities and impact how best to direct your existing portfolio assets.
What is the difference between mandatory and a discretionary trust distributions?
The main difference lies in the degree of control a trustee has over making distributions from the trust. With mandatory distributions, the trustee has no flexibility and must make pre-scheduled distributions as specified in the trust document. With discretionary distributions, on the other hand, the trustee has a choice whether to make distributions, and can adjust the distribution amounts based on a beneficiary’s needs, to gain trust tax efficiencies, or in response to other factors.
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