Dear Liza: I want to name my minor grandchildren as beneficiaries of my IRA account. How do I do that? Can I use my Will? It’s a smart idea to name minors as beneficiaries of your IRAs. Since they are young, they’ll be able to withdraw that money slowly over their life expectancy, and only pay taxes on the amounts withdrawn. But you are also correct in understanding that minors need some kind of property guardian or custodian named to manage those assets for them until they are 18–since minors can only own a minimal amount of property.
So, how do you do it?
Don’t try and name beneficiaries in your Will. It won’t work. Your Will is a legal document that governs the distribution of many of your assets, but NOT your retirement accounts. Those will pass only by the beneficiary designations on file with the plan administrator.
Here are the ways that I would advise you to let them know what you want them to do:
You can just name the minor as a beneficiary. Then, if you die while that child is a minor, their parent will need to ask the probate court in their county to name a Property Guardian to manage that account until the child is 18. (The property guardian could be the parent.) In some states, if the IRA is small enough, no property guardian need be appointed, but that will vary state to state. This isn’t ideal, since going to court takes time and some money for filing fees and it ends when the child turns 18 (at which point the money is theirs to manage and spend).
Alternatively, you can name a custodian under your state’s Uniform Transfer to Minor’s Act, which will make that person the custodian for those assets up to a certain age (21 in many states: 25 in others). A beneficiary designation like this would read, “Alan Smith, as custodian for Jane Smith, under ___’s Uniform Transfer to Minors Act to age 25.” Custodial accounts are inexpensive and easy to open at banks and brokerage accounts and end at 21 or 25 (usually), which is older than 18.
Finally, you can name a trust created for that minor as the beneficiary. That way, the trust will manage the money for that child and can last as long as you’d like it to last. A designation like this would read, “Trust created for the benefit of Jane Smith, under the SMITH FAMILY TRUST, under Agreement dated _______.” Trusts can have whatever terms you’d like to use and can last as long as you’d like them to last. IRA withdrawal rules are complicated when a trust has more than one beneficiary, so it’ s not a do-it-yourself project. Their main disadvantage is cost — you’ll have to work with an attorney to draft them.
If the plan administrator doesn’t have a form that makes it easy to name a custodian or a trust, you can do it anyway. Just attach a beneficiary designation form to their form, and make sure that they provide you with confirmation that your wishes have been properly received.
Dear Liza: After dealing with an unexpected death of my spouse my head is still spinning.. My spouse was very private after a divorce and we kept our affairs separate. Now the Will, of which I was unaware, allows me to stay in our home and if I choose to leave or pass it goes to her children. The attorney who handled the will said I have control of what happens;
1) I can stay in house till death and take 20% of non probate
2) I can take 1/3 of elective share and no house
3) Or I can select make children offer to buy house based on actuarial tables and 20% of non probate.
How do I get that info to make a good decision? Will says to maintain house in good repair, so does that mean I have to put another $20K for a new roof? I’m sorry that you have to make such important choices and were taken by surprise by them, on top of the grief that comes with losing a spouse. Here’s my advice: hire an attorney to represent you, as the beneficiary under the Will. You need someone who can advise you on your options and explain to you what the Will means — not just in regard to what “good repair” means, but also as to what your elective share rights are, for a start (these are determined by state law).
Please ask that attorney how a Will can offer you twenty-percent of “non-probate” assets, as these generally are assets that pass by beneficiary and are not controlled by a Will at all. If your spouse named you as the beneficiary of her retirement assets or if you owned property with her as a joint tenant, these assets would pass to you by virtue of that, not by the Will at all.
Dear Liza: We live in Nebraska. I own a ranch with my brother. Part of it we inherited and a small part we purchased from family members. The total value of the ranch is $2.7 million. We have a buy sell agreement between us. We have estate questions and aren’t sure where to go. We each have other assets of approximately $2 million and $4 million respectively. We have considered a trust; however I have two children and my brother has a second wife and four children. We do not want our offspring to have to deal with each other.
So, that’s a REALLY interesting question, and one that involves trusts, but only tangentially, really. The thing is, regardless of whether your estate plan consists of a Will or a trust, your families are most certainly going to have to deal with each other upon the death of you and your brother. You wrote that you own the ranch together….usually, siblings would own a ranch like that as tenants in common, which means that you each own one-half of it and are free to leave it to whomever you’d like to leave it to upon your death. (The less usual alternative, for siblings, would be as joint tenants, which would mean that the survivor would own the entire property at the death of one of you.)
Assuming you each own your half and can leave it at death to others, how on earth are you going to avoid each family having to work something out? Even a buy-sell agreement will require, at a minimum, that one family buys and the others sells, right? Placing your property into a trust will avoid having to go through probate, and gives you the opportunity to try and plan for reducing conflict down the road. You can each place your interests in different trusts, and specify how each half should be managed upon your deaths.
If you don’t do a trust, then your estate will go through probate, and that in no way reduces the possibility of inter-family conflicts–in fact, it almost invites it, because probate is public, and all interested parties are required to get proper notice and have an opportunity to object to the proposed distribution. With a multi-million property on the table, I would advise you and your brother to hire a good estate planning attorney now to do what you can to anticipate problems and structure the management of the property down the road.
Dear Liza: I am helping my friend make a Will. It’s very simple, with one heir. She wants to make sure her brother, who is her only living relative and from who she has been estranged from since they left home (she’s 75 ) is not able to challenge the Will. She wants to specifically exclude him in the Will. Is there wording for this and is it necessary? It is very nice of you to help your friend draft her Will. The best way to make sure that her brother can’t challenge the Will is for her to be explicit about excluding him. She can state simply that she is deliberately leaving nothing to her brother, for reasons know to him, or something to that effect.
As her brother (not her spouse or a child), he can’t make an argument that he has a legal claim to her estate simply by reason of their relationship to each other, however, it never hurts to make it QUITE clear that you are excluding someone if that is important to you. In addition, your friend should be careful to properly sign her Will before witnesses as required under her state’s laws. If she has no other legal heirs than her brother, the legal challenge that he might make is simply to invalidate her Will altogether (then inherit as her only legal heir since she would then have died without a Will at all)–so, she should be sure to have the witnesses be able to state that she had the mental capacity to make the Will and that she was under no duress to do so.
Dear Liza: My wife and I are the proud parents of two young boys. As a part of our estate planning we have created a Joint Living Trust and funded it with the title to our home, our life insurance policies as well as a few other things. We are now, however, expecting a third child next year! While this is exciting, I am wondering what the implications for our estate planning will be. Specifically, right now, if my wife and I both die, we have our assets divided up 50/50 between our two current children. However, when our third child is born, obviously we want him or her to be included and our assets divided up 1/3 each. Is there a way to make an “addendum” or revision to our Joint Living Trust, so that our current one is still viable, but we only make that small change? We want the same people to be the executors, guardians, etc., but just change the primary beneficiaries from 1/2 each to 1/3 each. Since we have already funded the trust, it would be a pain to go back and change the funding of the trust to a new one, because the “date of execution” of our trust would be different. Congratulations! Yikes! Three kids is enough to keep anyone busy. Before you change your trust, read it. It might say that the definition of “children” includes the two boys you have now and any future children born to you. If so, the trust should also say that your estate is to be divided in equal shares for each of your living children, and one share for any deceased children. If it’s written that way, your new baby is already part of the story. If not, you can either amend your trust to add the new baby, or restate your trust–which is a way to have a whole new trust, but keep the same name and original date, for the very reason that you articulate in your question, so that you do not have to re-title assets already transferred into the trust.
Dear Liza: My long term domestic partner of 30 years and I were registered domestic partners for a few years and then she decided she wanted to be totally financially independent of me so we terminated the agreement last year. We are still together as a couple and live five minutes away from each other. Our intention is to leave everything we own to each other and have named each other as executors in our wills. She owns a house that she may or may not be selling but in general our estates are pretty modest. I am wondering since we are still a couple is there is an advantage in terms of avoiding probate in getting married versus doing a living trust? First, can I just say I love being able to have this conversation! Now, down to business. There’s a lot packed into your question. I’m going to answer on a general level, but I think it would be worth it for you and your partner to sit down with an accountant and an attorney and see how my advice addresses your particular concerns.
There are three key estate planning advantages to getting married for same sex couples now, but I wouldn’t frame it as a living trust versus marriage. That’s kind of apples and oranges. A living trust will still allow you to transfer your assets to each other without probate, regardless of whether or not you marry. But being married has two key federal and one state TAX advantage, all of which you’d realize with or without a living trust.
1. Married couples get a step up in basis when one spouse dies on all community property assets. That means that the surviving spouse won’t have to pay capital gains on any appreciated assets that she sells after the first death, other than any gain that happened after the death of the first spouse. For example, if your partner’s house has appreciated a lot since she bought it, and you marry and make that house community property, when one of you dies, that house would be valued at its date of death value, not the original purchase price.
2. Married couples get an unlimited marital deduction from federal estate and gift tax. That means that you and your spouse can give an unlimited amount of assets to each other, at death or during life, and no federal estate or gift tax will be due for those gifts. For those with modest estates (which are most of us) this isn’t as big a concern now that the federal estate and gift tax exemption is $5.25 million, but that number may be reduced by Congress in the future, and it is a benefit that only spouses receive. This, in fact, was the basis for Edie Windsor’s challenge to DOMA.
3. Married couples can pass real property to each other in California without a change in property tax rates. A transfer between spouses is an exception to Proposition 13’s reassessment requirement. Since you and your partner terminated your Registered Domestic Partnership, and it sounds like she purchased the property alone, her transfer of the house to you via a Will would trigger a change of ownership and reassessment for at least 1/2, if not all, of the property, depending on how she holds title at her death.
Dear Liza: My wife’s Aunt just died. We went to the funeral because they had been rather close and she wanted to represent her mother’s side of the family. While attending there was a passing reference to how she and some other members of her family were in the Will. What should we expect at this point? Whose obligation is it to notify us? Do we have specific rights in this matter? I’m sorry to hear about your Wife’s Aunt. And all of the questions you are asking are such good ones! Rules vary a bit state to state, but the general idea is that the person who has custody of the Will is required to lodge that Will with the probate court in the county where your Wife’s Aunt lived. In California, where I practice, this is supposed to be done within 30 days of the death. Once the Will is lodged (which means filed with the court), it is a public document, so you, your Wife, and anyone else can get access to it.
If your Wife’s Aunt had sufficient assets to require a probate proceeding, again this amount varies from state to state, the executor named in the Will would petition the court to open a probate proceeding. This will require publication in a newspaper in the town the Aunt lived in — the idea is that probate is a public proceeding and publication gives notice to creditors who may want to file a claim against the estate. Also, all of the Aunt’s heirs and beneficiaries would be notified of the probate, and, if anyone objects to the appointment of the executor or the validity of the Will, they can file their objections with the court.
If the Aunt’s assets fell below the limit for a probate proceeding, and here’s a list of the limits for various states, then no probate proceeding needs to be opened, but the Will should still be filed.
Assets left by beneficiary designation are NOT part of the estate passing under your Grandmother’s Will
Dear Liza: My grandmother passed away peacefully at 97 in February. I am the executor of her will. She had changed her will, legally, several times depending on who had made her mad at the time. Instead of changing it again, she made me the sole beneficiary on some cd’s and mutual funds. In her will, she left $15k or 15%, whichever was less to my half sister. Do I have to count the funds that were left to me specifically as part of the estate? Your grandmother sounds like she was pretty sassy. The assets that were left to you directly by beneficiary designation DO NOT count as part of the lesser of 15% or $15K gift your grandmother made to your half sister.
Only the assets that are governed by the Will count for that calculation and are considered to be part of the “estate.” The assets left to you by beneficiary designation are separate from the assets that will pass to beneficiaries under your grandmother’s Will. If your grandmother’s Will has to go through probate, the assets that pass by beneficiary designation are not part of the probate estate, either.