Choosing beneficiaries
Determining who gets what and when
While your will, and possibly a revocable living trust, are important parts of your estate plan, there are several other ways that your wealth could be transferred after your death. A coordinated plan is critical in making sure your wishes are understood and carried out.
Where there’s a will
When it comes to estate planning, you want to make sure you've indicated how – and to whom – you wish to leave all your assets. The goal is to make things as easy as you can on your loved ones by having at least some, if not all, of your assets pass outside of the probate process.
Probate, the official proving of a will
The average length (and cost) of probate and estate settlement varies from state to state, from a minimum of a few months to more than a year. Several issues can affect how long this process might take.
- Multiple beneficiaries
- Beneficiaries live out of state
- Certain family members have been "cut out" of the will
- The will is being contested
- Creditors are filing claims against the estate
- The estate is taxable
- The IRS needs time to approve the estate tax return
- The assets are complex
Beneficiary basics
A beneficiary designation allows you to specifically name who will get particular assets, typically without the need for court supervision in a probate proceeding. Usually you'll name primary and contingent beneficiaries. The primary beneficiary is the first person or entity named to receive the asset. The contingent is the "backup" in case the primary beneficiary is unable or unwilling to accept the asset. You can name multiple beneficiaries for several types of accounts.
- 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 plan
- Life insurance policies you own and those provided by your employer
Most have a default provision that says who the beneficiary will be if you don't name one. Often times the default is your estate. However, this may not reflect your wishes and could have tax consequences.
Addressing life’s changes
You can always change your beneficiary designations. In fact, it's likely that you'll want to do so as your family and finances change over the years. For example, there's no automatic change when you get married. However, in many states, an ex-spouse will automatically be eliminated as a beneficiary. But don't assume this happens. Be proactive and update your plan.
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You must name the same person as beneficiary to all of your retirement plans, life insurance and other accounts.
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You can name the same beneficiaries to everything, but you don't have to. You may have a specific account that you wish to pass on to a particular person or entity while others go to someone else (or multiple people).
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You can name the same beneficiaries to everything, but you don't have to. You may have a specific account that you wish to pass on to a particular person or entity while others go to someone else (or multiple people).
Why asset titling is important
Titling is just a formal way to describe how you take ownership of property.
- The way you take title determines whether your will, revocable trust or the titling itself controls the distribution of the asset.
- You should consider the effect titling will have any time you make a large purchase or enter into a business arrangement.
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). Your will and revocable trust do not control the distribution of the asset unless you are the last surviving owner.
Tenants-by-entirety
Spouses own and must act together in making decisions about the property. This type of ownership is often thought of for asset protection purposes. Your interest passes directly to your surviving spouse. (Not available or limited in some states to particular types of property.)
Sole or separate property
Assets that you own individually, in which your spouse has no ownership interest. Your will or revocable living trust (or state law if you die without either) controls its distribution at your death.
Tenants in common
You own a portion of the asset, while others own other portions. You control the disposition of your portion and they control theirs. Your interest will pass under your will or revocable living trust.
Tenants in common
Each spouse owns one-half of the asset and is able to dispose of it as he or she likes under a will or revocable living trust. (Not available or limited in some states.)
Getting started
Your situation today may be pretty straightforward, but it can become more complicated as you get older, establish a career, have a family and start saving for retirement. 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 if you know, make note of how each asset is titled. - Review existing agreements
Review any prenuptial agreements or divorce decrees to determine your potential benefits and obligations. - Review business and investment restrictions
Review any family business or investment entities to determine what restrictions, if any, apply to your interests in the entities and what terms govern the disposition of your interest. - Review beneficiary designations
Review the beneficiary designations for any life insurance and retirement accounts to confirm who you currently name and if those individuals or entities still match your intentions. - 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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