INVESTOR PLUS

Many investors consider estate planning one of the most difficult aspects of creating an overall financial strategy. But the benefits far outweigh the challenges. An estate plan can provide peace of mind as you determine how your assets will be distributed after your deathincluding who will inherit them, who will control their distribution, and when your beneficiaries will receive them.

You'll want to start by accounting for all of your holdings, including real estate, business interests, securities, life insurance policies, bank accounts, and retirement plans. Once you have a complete picture of your estate, you can begin to make decisions regarding who should inherit your assets and how.

CREATE A WILL OR REVOCABLE LIVING TRUST
A will is a fundamental piece of any estate plan and contains your instructions for distributing the assets you own individually (without beneficiary designations), or your share of assets held as tenants in common, at the time you pass away. "A will should be comprehensive but doesn't need to mention every item you own," says Christine Fahlund, CFP®, a senior financial planner with T. Rowe Price. "In fact, because many of your assets, like jewelry, may change over time, a lack of specificity can be advantageous and can help you avoid having to update your will on a continuous basis." To communicate your wishes regarding certain items, you may want to write a memorandum in which you describe to your heirs the assets you own along with the names of individuals you wish to receive such assets upon your death. While not legally binding, it can document your wishes. An exception would be any particularly large assetfor example, a housewhich definitely should be mentioned in your will if you have special desires for its distribution.

Fahlund notes that a popular alternative to a traditional will is a revocable living trust. A trust is a legal agreement in which the trustee (or co-trustees) holds the title to a specific asset on behalf of someone else (the beneficiary). With a revocable living trust, you can put all of your assets into a trust on behalf of your beneficiaries while you are still living. In addition, you can name yourself or someone else as trustee, depending on who you want to manage your assets. "Revocable living trusts provide flexibility because you can change the termsincluding the trustee and beneficiariesat any time," says Fahlund. "Another benefit is privacy. Traditional wills generally are a matter of public record, while revocable living trusts usually are not."

Click each question to reveal the answer

 

What happens if I pass away without creating a will?

If you pass away without a valid will, the laws in your state of legal residence determine who will inherit your assets that are subject to probate. Keep in mind that state laws may be different than your wishes and generally leave assets exclusively to your relatives. "Also be aware that the distribution of your assets to family members is based on their relationship to youand some may receive more than others," says Fahlund. "If you have close friends or charities you would like to benefit, and you do not have a will, consider naming them as beneficiaries of your retirement accounts or life insurance policies."

I have a revocable living trust; do I need a will too?

"If you have a revocable living trust, it's a good idea to have a 'pour over' will" says Fahlund. "A pour-over will simply states that any assets you own outside of your revocable living trust should be transferred or 'poured over' into your trust at the time of your death." A pour-over will can be short and doesn't need to contain any of the private provisions of your revocable living trust. That said, you generally cannot name a guardian in a revocable living trust. So if you have minor children, a traditional will is needed to designate a guardian, otherwise the decision could be left to a court.

What is probate and is there any way to avoid it?

Probate is the court-supervised process of distributing any assets after your death that do not automatically pass to your heirs through joint tenancy with right of survivorship, beneficiary designations, or existing trusts that were funded while you were still alive. While probate is designed to protect your family members and creditors in the event of your death, it also may be a costly and time-consuming process. Creating and funding a revocable living trust now can enable your heirs to avoid probate for any assets held in the trust at the time of your death.

DESIGNATE YOUR BENEFICIARIES
Designating beneficiaries for your retirement accounts can be an attractive, efficient way to transfer wealth to your heirs outside of a will or trust. "However, you may prefer to have these assets pass to your heirs according to instructions included in your will or revocable living trust," says Fahlund. "This can be accomplished if you name your estate or a revocable living trust as your beneficiary." (It may also occur if your beneficiary designation "fails," such as when no beneficiary survives you.) Fahlund recommends submitting your beneficiary forms immediately to your financial institution when you open an individual retirement account (IRA), begin contributing to a 401(k), or buy a life insurance policy, naming both a primary and secondary beneficiary. "It's a good idea to review your forms regularly and file new ones if you need to make updates following major life events, such as the birth of a child, the death of your primary beneficiary, or a change in your marital status," Fahlund adds.

Click each question to reveal the answer

What happens if I don't have beneficiary forms in place for my retirement accounts or insurance policies?

If you pass away without submitting your beneficiary form, the distribution of your assets is made according to the IRA or life insurance agreement you signed, which may vary among financial services providers. "For example, at T. Rowe Price, our IRA agreements specify that if you pass away without a signed beneficiary form, your assets will first go to any surviving spouse," explains Fahlund. If you are unmarried at the time of your death and haven't completed a beneficiary form, your assets will go to your estate to be distributed according to your will. And if you don't have a will, your assets will be disbursed based on the laws of your state of legal residence.

What do I need to know if I want to name a minor as my beneficiary?

Most retirement plans and insurance companies will not pay benefits directly to a minor. Instead, the assets will be held in an account to be managed by a guardian or custodian until the child reaches the age of majority under state law, typically 18 or 21. "If you have children under the age of 18 and want to designate them as your beneficiaries, it's important also to name a guardian or trustee," says Fahlund. "If you haven't named a guardian or trustee in your will, a court will do so on your behalf."

What is the difference between distributing assets to my beneficiaries per capita versus per stirpes?

When you designate multiple beneficiaries on a beneficiary form for an account (or if you name multiple beneficiaries in your will or trust agreement), your assets may transfer to your beneficiaries according to a per capita method or a per stirpes method. A per capita designation generally divides an asset equally among only the beneficiaries specified who survive you. If one of the beneficiaries passes away before you, his or her share goes to the other beneficiaries listed. With per stirpes, on the other hand, in the event that one of the beneficiaries predeceases you, his or her share of the assets generally passes to his or her heirs who survive you, not to the other beneficiaries listed. You may want to review all of the beneficiary designations you have in force today and confer with your estate planning attorney as to whether they will actually accomplish what you intend. Be sure you understand how each institution handles the situation based on its policies and the choices you have made as reflected in the institution's records. At T. Rowe Price, for instance, your IRA assets would be distributed per capita to the beneficiaries on file unless you specifically stipulated to the contrary.

I'm married, but my house is titled in my name only. What happens to the property when I pass away?

First, your spouse may have rights under state law to a portion of your estate regardless of the titling of assets or what your will provides. But generally, your home will be passed according to the specifications of your will (or if you don't have one, according to the state in which the property is located). You should be aware that if the house is transferred to your spouse in the absence of a will as part of the probate process, however, it may take some time before your spouse finally has clear title to the property. In situations like this, be sure to have sufficient assets available to satisfy any mortgage remaining to avoid your executor having to sell the house to pay the debt.

If you're married and want your home to pass to your spouse, consult with your attorney about the other choices available to you, such as titling your house as joint tenancy with right of survivorship or in the name of your revocable living trust. You may want to review all of the beneficiary designations you have in force today and confer with your estate planning attorney as to whether they will actually accomplish what you intend. Be sure you understand how each institution handles the situation based on its policies and the choices you have made as reflected in the institution's records.

MAKE EVERY DETAIL COUNT
"Often people start their estate plans but never finish them, creating the risk that the final disposition of their assets may not reflect their wishes," says Fahlund.

If you overlook the retitling of an account or don't submit important paperwork, your wishes may not be carried out. "Effective planning is the key to successfully passing your assets in the manner that you intend," Fahlund concludes.

Review Your Current Real Estate Titles
Real estate titles can be an easy part of your estate plan to overlook because once they are established, they don't normally change. And since there are several ways to title property, it can be helpful if you're familiar with the different ownership categories for estate planning purposes. Understanding the differences in ownership structures helps to ensure that your properties are titled in the manner you wish and will be inherited by the people you've selected.

SOLE OWNERSHIP

The title is held in your name alone. The property passes to your heirs according to your will. If you have not provided written instructions in the form of a legally effective will, your family will have to rely on the laws of your legal state of residence and, if different, the state in which your real property is located to determine how your property will be distributed.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

You and one or more persons own property jointly. The property avoids probate and passes directly to the surviving joint tenant(s). When only one survivor remains, that person becomes the sole owner.

TENANTS IN COMMON

Two or more persons own property but without survivorship rights. After you pass away, your interest in the property passes to your heirs according to your will or the laws in your legal state of residence and, if different, the state in which your real property is located. The surviving co-owner still owns his or her share.

 

The T. Rowe Price Estate Planning Site

The estate planning area of our website provides you with pertinent information to help ensure your assets will be distributed according to your wishes. While you won't be able to create an actual estate plan on the site, you can develop a more focused understanding of your estate planning objectives through discussions on topics including:

PLANNING FOR TOMORROW Have you considered what will happen to you if you suffer an accident or other illness that leads to your incapacitation?

EXECUTING A WILL is a useful estate planning tool for most people. Without a will, state law may control the distribution of your estate.

TRANSFERRING ASSETS How you own your assets may allow for a speedy and question-free transfer of those assets after you pass away.

CONSIDERING A TRUST can be a valuable estate planning tool to provide privacy and increased control over assets.

 

MANAGING ESTATE TAXES Most estates are not subject to the estate tax, but it's useful to know the general mechanics of estate and gift taxes.

GIVING TO CHARITY is not only personally rewarding during your lifetime, but it may establish a legacy of goodwill at your death.

CREATING A STRATEGY Putting together all the aspects of estate planning can be easier when you understand the options available.

Learn More Click here to learn more
about estate planning.

ILLUSTRATION BY JAMES STEINBERG

1 An early start to saving may help you afford future college costs.
2 Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price, explains that the amount you save toward retirement can have a dramatic impact on your retirement.
3 Don Peters, portfolio manager of the
T. Rowe Price Tax-Efficient Equity
Fund, discusses his strategies to minimize capital gains and maximize after-tax returns.
4 A Diversified Blend of Growth and Value.
5 Depending on the plan you choose, you and your employees can enjoy tax-advantaged savings, plus a broad range of investment choices.
6 Saving for college can help you meet the costs of higher education. And don’t overlook the important contribution grandparents can make.
7 T. Rowe Price FuturePathSM helps you see the impact of key decisions as you approach retirement.
8College Savings Plan receives Morningstar's highest rating; T. Rowe Price outperforms; Connections explores big trends.
9Powerful and innovative technology is set to become a bigger part of our lives—including robotics, genomic advances, and seamless device connectivity.
10The new tax laws exempt millions of middle-class taxpayers from the AMT. What steps can help you manage and minimize your exposure to the tax?
11How the fundamental benefits of creating an estate plan far outweigh the challenges of setting one up.
11A clear understanding of your portfolio's exposure to risk may allow you to maintain an appropriate long-term strategy.
11Compounding can generate wealth.