INVESTOR PLUS

Managing Your Estate PlanManaging Your
Estate Plan

One constant in life is changein your lifetime you may marry once or multiple times, become a parent and grandparent, and hold any number of jobs. While you may not be able to predict many of life's events, you can routinely review your estate plan and take steps to keep it up to date to ensure your assets pass to your heirs according to your wishes, even when your circumstances change.

An Annual Review of Your Financesou can establish an estate plan now that will govern your assets and reflect your priorities, and over time you can adapt and revise your plan as your life unfolds. "You spend your lifetime accumulating assets and taking great care in how you manage and invest them," says Christine Fahlund, CFP®, a senior financial planner at T. Rowe Price. "It's equally important for you to consider on an ongoing basis howand to whom your assets will be distributed at the end of your life." The following estate planning components need particular attention at various life stages. You should work with an estate planning attorney to help document your plan and ensure that it will achieve your goals under state and federal law.

WILLS

Your will controls the distribution of assets that are individually owned and subject to your probate estate, but not typically assets owned as joint tenants with right of survivorship (WROS) or assets that have a beneficiary designation in place. A will also allows you to name guardians for any children, establish trusts, and provide instructions for the management of those trusts. In the absence of a will, the laws in the state of your legal residence determine who inherits assets subject to probate. Establishing or reviewing your will is particularly important in the following situations:

Change in marital status

In most situations, each spouse should have a will that stipulates plans for assets held in his or her name only, without any beneficiary designations. In the case of either divorce or possible remarriage, revisit your will to ensure that it still represents your wishes.

Birth of children

A will is a critical document for parents of minor children because it allows you to designate a guardian for them. Without a will, a court in the child's state of legal residence would name his or her guardian. "Even if you're a young parent without many assets, a will is critical," Fahlund says. "There is no other vehicle for stipulating your desires when it comes to the care of your children should anything happen to you."

Don't let indecision about your choice of guardian delay the writing of your will: If you change your mind about whom you'd like to name as guardian, you can simply add a codicil, or amendment, to the will or have it rewritten, depending on the recommendation of your estate planning attorney.

TRUSTS

Trusts created under your will (testamentary trusts) describe how your assets should be managed and distributed after your death. They can be especially useful for managing assets left to minors and for controlling distributions of assets in complex family situations. Testamentary trusts can also be created under a revocable living trust. Regardless of which vehicle you choosea will or a living trustduring your lifetime, you can always change the trust's terms, including the beneficiaries or trustee, at any time.

Birth of children

When you establish testamentary trusts for children, consider naming a trustee who is different from the individual you have named as guardian of the minor children. This can help the new family unit avoid experiencing conflicts arising over money.

If you're concerned about the privacy of your estate plansparticularly about the amount and timing of any distributions your children or grandchildren may receiveconsider establishing a revocable living trust now along with a pourover will. A pourover will includes instructions for your executor to gather up any assets in your name, at the time of your death, that are not already in the trust and "pour them over" into your trust. Because a will is a matter of public record, it is eventually filed in a courthouse in your state of legal residence, where complete strangers may be able to access the information it contains. Revocable trust agreements, on the other hand, remain private documents in most states.

ESTATE PLANNING FOR
UNMARRIED COUPLES

Some couples face unique challenges when planning their estates, since laws generally don't apply to all types of relationships. Pay particular attention to the following:

Consider establishing accounts or property titles as "joint tenants with right of survivorship." Or name each other as beneficiary of each partner's solely owned accounts.

Death of a spouse

A bypass trust can be useful for couples who expect to be liable for estate taxes. The federal estate tax exclusion is set permanently at $5 million and is indexed for inflation. The amount for 2013 works out to $5.25 million. Although state laws vary, couples with assets of more than $5.25 million per person in 2013 are likely to fall into that category.1 If you do, consider using your will to direct the executor of the estate of the first deceased spouse to fund a bypass trust with the assets that are solely owned by that spouse, up to the estate tax exemption amount. This strategy would allow you and your spouse to pass up to $10.5 million free of federal estate tax to your heirs if you were both to die in 2013.

Since assets held in a bypass trust technically "bypass" the surviving spouse, they will not be included in the survivor's taxable estate. Income from the trust, however, generally is distributed to the surviving spouse on an ongoing basis; usually, principal may be distributed if the spouse is ever in financial need. The ultimate beneficiaries of the bypass trustyour children, grandchildren, or other beneficiarieswould be the recipients of the assets remaining in the bypass trust upon the death of the surviving spouse. One potential financial benefit of a bypass trust for your heirs is that the assets remaining in the trust at the time of the surviving spouse's death will not be subject to estate taxes, regardless of whether the size of the portfolio has increased significantly since the time of the first death.
1 wsj.com, January 20, 2013.

Marrying again

Establishing a qualified terminable interest property trust (QTIP) under your will or trust can help you meet dual goals: providing income for a surviving spouse while preserving assets for children from a previous marriage. The surviving spouse receives income from the trust's assets but generally cannot receive any distributions of principal or dictate the disposition of the trust's assets. Upon the death of the surviving spouse, the remaining assets are distributed to the beneficiariesthe children from a previous marriage, for exampleaccording to your specifications.

BENEFICIARY DESIGNATIONS

While wills and trusts receive much attention in estate planning discussions, in some circumstances, you may be able to take advantage of other simpler and more straightforward techniques for passing assets to heirs.

Designating beneficiaries on your investment accounts and insurance policies would transfer these assets outside your will (assuming such persons survive you), regardless of the instructions you may have laid out in that document. There is, however, at least one exception to this rule: If the beneficiary of an account is "my estate," those assets will be distributed according to your will or the laws of your state of legal residence. One problem with passing assets directly to beneficiaries other than through your estate, however, is that they would not be available to your executor or trustee to fund a bypass trust. Pay particular attention to beneficiary designations and account titling at the following life transitions:

Job change

Changing jobs means you'll have the opportunity to designate beneficiaries on your new employer's retirement account. This paperwork can serve as a reminder to review the beneficiary designations on any retirement accounts you hold through former employers.

Divorce and remarriage

If you are getting divorced, you can remove your spouse as the beneficiary on any life insurance policies and IRA accounts. With workplace retirement plan assets, on the other hand, federal law dictates that as long as you remain married, your current spouse must be the default beneficiary on your retirement plan accounts, unless he or she specifically declines those benefits in writing. A qualified domestic relations order (QDRO) will dictate how any assets in employer retirement plan accounts are to be divided during divorce proceedings and, in some cases, how beneficiary designations on the accounts are to be treated.

ESTATE PLANNING FOR
BLENDED FAMILIES

Blending families through marriage can be complexand that complexity extends into the process of estate planning. If you are part of a blended family, give particular consideration to the following elements of your estate plan:

Determines which assets are marital property and which are not. This agreement may serve as one important way to preserve your rights to your own assets, as well as the rights of your heirschildren and/or chosen charitiesat your death.

Birth of children or grandchildren

You can name minor children or grandchildren as beneficiaries on investment accounts and life insurance policies, but generally, you cannot add them as joint owners to savings or investment accounts until the children reach the age of majority. Fahlund urges caution when naming young adult children as beneficiariesespecially if they are inexperienced in financial matters. Consider whether or not you would want them to inherit a significant sum at age 18, or even age 21. "If that possibility is of concern to you," she says, "you could name your estate as beneficiary and explain in your will that the assets should be held in trust, with each child receiving income annually but not inheriting any of the principal until an age or ages of your choosing."

A SOUND PLAN

A comprehensive estate plan enables you to control the management and distribution of your assets after you die. Estate planning can seem like an unwieldy task, full of complicated details and unfamiliar terms. But if you approach the job methodically, one step at a time, you can gradually build a comprehensive estate strategy that reflects your wishes for the people closest to you. With help from an estate planning attorney and a trusted financial advisor, you can do your best to ensure that your loved ones are well provided for when you are gone.


illustration by alberto ruggieri

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3Jerome Clark, portfolio manager of the
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