Estate Planning Considerations - T. Rowe Price

Many investors consider estate planning one of the most difficult aspects of creating an overall financial plan. But the benefits far outweigh the challenges. Following are five considerations to keep in mind when designing an effective estate plan.

When it comes to transferring assets, for example, it can be relatively quick and easy to retitle your solely owned assets as joint tenants with rights of survivorship (WROS) and to name beneficiaries for your IRA accounts. However, the potential disadvantages of this approach include allowing young beneficiaries to inherit the assets at the age of majority (usually 18 or 21) with no strings attached.

Also, it may be advantageous for certain beneficiaries to maintain their inheritances in a trust to be invested and distributed by a trustee and possibly protected from a beneficiary's creditors by a spendthrift provision. In this case, you would need to have a will or trust agreement prepared that provides all the details to the executor and/or trustee as to how the trust should be created, maintained, and distributed.

Or in this case, your beneficiaries will be subject to the consequences of what you did or didn't pay for. Drafting your estate planning documents should not be a do-it-yourself project. If your estate plan is not thoughtfully prepared by someone who is knowledgeable and experienced in such matters, your beneficiaries may suffer the consequences. Even if you believe you are using good forms as guides, failure to have the documents executed, notarized, and/or witnessed as required by your state's laws can make them worthless.

If certain powers are bestowed upon the trustee, executor, or trust beneficiaries in your document, for example, they can make a difference in the quality of a beneficiary's experience in the years following your death. What if your will says that a trustee should distribute income to your beneficiary from a trust created under the will, but the trustee is given no discretion to distribute principal to the trust beneficiary? Could that decision potentially harm your beneficiary? Issues like this need to be discussed with your attorney.

Some assets in your estate may be ones you never know about. For example, if you were to die in an accident that was due to negligence, your estate might sue the party deemed responsible, resulting in a large monetary settlement that would be included in your estate. If you have a will, it would stipulate how the assets in your probate estate, including this new settlement amount, should be distributed. Otherwise, your legal state of residence would determine who inherits them. In some states, for example, your estate might be divided between your spouse and your children.

Writing a will or trust may seem to require more time and effort than it is worth if you know that you wish to leave all your assets outright, without any strings attached (i.e., not in trust), to individuals and charities through the use of joint tenancy WROS and/or beneficiary designations. Keep in mind, however, that if you fail to arrange for the disposition of every asset and you don't have a will, state law may ultimately dictate to whom some or all of your assets will be distributed. For example, you typically own outright all your personal property like cars, jewelry, artwork, etc., without a joint owner. Without a will, the disposition of your personal property follows the laws of your state of legal residence.

It is usually very simple to understand what will happen to jointly owned assets at your death and to those assets with beneficiary designations. Understanding what your will and trust say about how your solely owned assets are to be distributed can be harder—both for you and your beneficiaries. However, this fact should not discourage you from having a will and/or a trust. For example, not all assets can have beneficiary designations and you may not have or want a joint owner with rights of survivorship.

Rather, we want to encourage you to take the opportunity now to understand exactly what will happen to these assets at your death. If you do not understand what your will says, ask your attorney. And if you have a partner, this would be a good time to ask what would happen if he or she predeceases you. What does his or her will say? It is better to find out now rather than after the fact.