If you have aging parents, you know the time will eventually come when you may be called upon to help with their finances. As we continue to extend our lives to 80 and beyond, there’s a better chance that the resources people put aside for retirement just don’t last as long as expected. In addition, illness later in life can render someone incapable of being able to take on their financial obligations. That’s where you come in as their child.

One or both of your parents may become ill, incapacitated, susceptible to scams and fraud, or unable to keep up with their financial affairs as their mental and physical abilities wane. It will be easier to intervene and prevent problems if you have talked to them about their finances in advance. Obviously, this isn’t an easy discussion to have, and in some cases and cultures talking about money was off-limits. But by planning ahead and having these difficult discussions before a crisis arrises can help ensure their wishes are carried out and help minimize problems with other family members in an already difficult time.

So, how do you even begin to approach this subject? Let them know that it will be easier for you to help them later when they need you if they share the details about their finances with you now. Take baby steps. If your parents are unwilling to discuss these details with you, at the very least they should tell you where they keep their important financial documents in case you need them in an emergency. This is an important first step, and ultimately will be the most important thing to know if the unfortunate happens.

The time for preparing powers of attorney and living trusts to give someone else the authority to make decisions about financial affairs or health care is before the need arises, while your parents still have their mental faculties. If your parents aren’t mentally capable signing these documents, you may have to seek legal guardianship, which can be a long and painful process. So it is imperative that these issues are discussed. It may still be too early to move forward with these measures, but it should at least be out on the table so that if health does start to deteriorate, prompt action can be taken to get the documents in order and it won’t come as a surprise to bring this topic up in an already difficult time.

What do you really need to know? The more you know the better. Having an understanding of their complete financial picture is helpful, but more important are the answers to questions such as: Do they have a will? Where is it kept? Do they have a living will or medical directives so someone can speak for them in case they are unable to speak for themselves? Do they have a durable power of attorney so someone can handle their financial affairs if needed?

Other information you should know:

• Social Security numbers.
• Details of insurance policies, including health, life, and long-term care.
• Health records.
• Medicare numbers.
• Debts and payments.
• Income, including retirement plans, social security, annuities, dividends, etc.
• Savings and investments, including bank account numbers and names of financial institutions.
• Tax returns.
• Location of safe deposit boxes and keys to the boxes.
• Names and phone numbers of legal advisors, doctors, attorneys, insurance agents, accountants, etc.

If it becomes necessary to take over the administration of your parents’ finances, it’s important to respect their rights and wishes. Give them as much control as possible and don’t make them uncomfortable. Keep their money separate from yours. Involve them as much as possible. Keep them informed.

Sure, this is an awkward discussion to have with your parents, and it won’t be easy. That’s why it is important to start slowly, and start early. Don’t just sit them down and tell them that you need to know all of their financial details. Instead, approach the situation casually. Maybe start by just bringing up the topic of wills over dinner or something. Mention that you and your spouse just updated your own will. This will often open the door to a discussion about your parents’ will, or lack of one, and from there you can learn more about their situation. Even better, if you learn they don’t even have a will, this is a great opportunity to get them to take that next step. From this initial discussion you will then be in a better position to go a little deeper and tackle some of the more serious issues.

Finally, let this be a reminder for you as well. It’s time to look at your own legacy planning. So, go through your financial accounts and make sure your beneficiaries are up to date, update that will, or get a will for the first time. None of these things are fun to think about, but they are just as important to your financial plan as saving and investing for the future. Your family will thank you if you take the time to get this stuff in order.

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With little fanfare, the U.S. Supreme Court ruled on a case back in January that highlights the importance of keeping your beneficiaries up to date. Having a beneficiary on file with one of your financial accounts can make the transition of assets upon death a very simple process. But with this simplicity comes complacency. It’s so easy to simply sign a piece of paper listing your beneficiaries and then forget about it. Unfortunately, if your situation changes or you die unexpectedly without updating your beneficiaries, you may have just created a big mess.

Case Background

Mr. Kennedy took part in the DuPont Savings and Investment Plan , an employer-sponsored ERISA-governed employee pension benefit plan. Mr. Kennedy designated his wife as the sole beneficiary of his plan benefits. When they divorced, the now ex-wife waived her interest in the Plan benefits through the divorce decree. However, Mr. Kennedy never submitted the waiver prior to his death and the divorce decree never became a valid QDRO. (QDRO stands for Qualified Domestic Relations Order)

In addition, Mr. Kennedy did not remove his ex-wife as his designated beneficiary under the DuPont plan. Upon his death, the plan administrator paid out his benefits to his ex-wife because she was still designated as his beneficiary. The appointed executor of the estate argued that because the order had been issued by a Court, his benefits should instead revert to the estate.

The Result

The court unanimously ruled that the ex-wife of a retirement plan participant, who was still named as the beneficiary at the time of the participant’s death, was entitled to the benefits of the plan even though she had signed a domestic relations order waiving her interest in the plan as part of the divorce agreement. The Court concluded that because the divorce decree had not been filed with the plan, it was invalid and was not a Qualified Domestic Relations Order (QDRO), ERISA’s sole mechanism to address the elimination of a spouse’s interest in benefits. Thus, the waiver could not take effect.

Additional Thoughts

You can see how this sort of thing could get ugly very quickly. In this case, through the legal process of filing for divorce the agreement was for Mr. Kennedy’s ex-wife to give up benefits to this plan. Since that was the intention it only makes sense that she shouldn’t have received any benefits upon his death. But the problem is that the plan administrator has no idea what’s going on unless the proper paperwork is filed. Since the QDRO was never filed, DuPont’s administrator had no way of knowing this was the determined outcome. And since Mr. Kennedy did not update his beneficiary form upon finalizing the divorce to list his new beneficiary, the plan must pay out according to what they have on file.

Of course, this assumes that the plan administrator is complying with laws, keeping proper documentation, and updating records accordingly. If the plan administrator had done something wrong, a case could possibly be made that would overrule this type of decision.

Don’t Assume It Can’t Happen to You

Not planning on getting a divorce so you think there’s nothing to worry about? This goes beyond getting a divorce. A death of a spouse, child, or simply a change in plans regarding how you’d like to distribute your assets upon your death are all things that could come up over time. I know, because I’ve seen these things happen firsthand. Getting through a death is difficult enough without having a surprise crop up once assets and benefits start getting dispersed.

Save yourself and your family some trouble and check your beneficiaries regularly. It only takes a few minutes so it’s worth the trouble. And if you do have a major life change that will impact how you wish to have your benefits paid out, get on it right away and don’t wait to make the necessary changes.

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Beneficiary designations are a way to pass on assets to another upon death through a contract. I wrote about transferring assets upon death by operation of law or contract last year, and it is a good primer to go through if you aren’t familiar with the subject. The most important thing to remember is that transferring assets in this way can have tax saving implications, and will generally be done separate of the probate process.

Two Real Stories

If there is anything to bring awareness to this subject, it is seeing firsthand what not having your beneficiaries updated can mean. Part of my job involves working with the survivors of a deceased plan participant and to help them sort out what to do with their retirement assets. In the past few months, there have been a few occasions that had unfortunate results simply because of the participant neglecting their beneficiaries.

The Untimely Death

In our generation, we pay little attention to the prospect of death. We generally expect to live another 40 years or more. Even so, the unexpected can happen, so that isn’t a reason to delay.

For example, not too long ago there was a participant in their mid-20s who unexpectedly passed away. Even at such a young age, they managed to save up some retirement assets. Unfortunately, being so young, they probably thought that there was no need to worry about things like beneficiaries. This is not a wise decision when you have a spouse and kids.

While the money is not lost, it does create some added problems. If the spouse had been set up as the primary beneficiary, they could have easily transferred the assets into an IRA in their name, and avoid taxes on a distribution and continue to defer taxes. Without a beneficiary, they are likely stuck with the result of the assets going to the estate, and then through the probate process. This may eliminate any special tax treatment, may take a long time to settle the estate, and could result in more attorney fees. This is unfortunate when you consider a beneficiary could be named in about 30 seconds by putting a name on a form or entering it online.

Outdated Beneficiaries

Another recent example that I regularly see is when beneficiaries are not updated when changes occur. The most unfortunate of this occurred when an old participant who was already retired had their sole beneficiary as their spouse. Normally, this is perfectly appropriate, but you have to remember to make changes if your spouse predeceases you.

In this situation, that is exactly what happened. Their spouse had passed on, and there were no contingent beneficiaries on file. That means once their spouse dies, there are no beneficiaries listed. They should have at least updated their beneficiary upon the death. Or, they could have named contingent beneficiaries so that in this situation, there would have still been someone in line to receive the proceeds of the account.

Instead, this participant died shortly after their spouse, and the accounts were left without any living beneficiaries. The siblings were obviously quite upset to realize that this was the case and that these funds were likely going to simply go into the estate, which they were concerned may put them into a situation that could trigger estate taxes. As a result, this could lead to an extremely costly mistake.

Don’t Make the Same Mistakes

As unpleasant as thinking about what happens to your stuff when die might be, it isn’t something to be avoided. Filing out a beneficiary form usually takes a matter of minutes, and with technology, can often be done immediately online. Even if you already have established your beneficiaries, you should double check to make sure the company still has a record of it, and that the correct people are listed.

Not only will you be able to possibly save time and money by going through beneficiaries, you can also make the difficult time surrounding a death just a little bit easier. Your survivors will have less to worry about, and it will make the difficult situation just that much easier.

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Definition of a Trust

According to Wikipedia:

In common law legal systems, a trust is an arrangement whereby money or property is owned and managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a settlor, who entrusts some or all of his property to people of his choice (the trustees). The trustees are the legal owners of the trust property (or trust corpus), but they are obliged to hold the property for the benefit of one or more individuals or organizations (the beneficiary, a.k.a. cestui que use or cestui que trust), usually specified by the settlor. The trustees owe a fiduciary duty to the beneficiaries, who are the “beneficial” owners of the trust property.

Benefits of a Trust

There are many possible benefits from using a trust, and there are various types of trusts that can accomplish different goals, but some of the most common benefits are:

• Providing greater control over the management and disposition of assets prior to or after death.
• Providing additional personal and financial safeguards to you, your family, or beneficiaries.
• The ability to possibly postpone or eliminate the need to pay unnecessary taxes.

Types of Trusts

There are many different types of trusts that all have specific uses, but the two primary types of trusts are:

Testamentary Trust. These are created as a part of the will become effective upon death, just like a will. The most common use for this type of trust is to allow the decedent to transfer assets to the trust for management by the trustee, who is then responsible for managing the assets and distributing the assets to the beneficiaries according to the provisions of the trust. In most cases, the assets will go through the probate process before being transferred to the trust, so there may be some concerns with public records and possible estate taxes.

One of the benefits of this trust is that there is greater control over how the assets are distributed. For example, the trustor could delay the distribution of assets for the sake of providing for a child’s education. The structured disbursements can be beneficial when the trustor wishes the assets to be used during a certain time or for a specific purpose.

Living Trusts. While testamentary trusts become effective upon death, a living trust is created during the lifetime of the trustor. Assets owned by the trust are normally not subject to probate, which can be a significant benefit for those wishing for privacy.

It is also important to understand that living trusts can be either “revocable” or “irrevocable”. Revocable living trusts are used in situations where the trustor doesn’t want to lose total control over the trust. This will allow the trustor to change provisions of the trust, add or remove assets, or even have the option to make it irrevocable in the future. Irrevocable living trusts may not be altered or terminated once the agreement is signed. A few common advantages to this type of trust are that the income may not be taxable to the trustor, and trustor’s assets may not be subject to death taxes in the trustor’s estate. (Keep in mind, these benefits can be lost if the trust is not managed properly or if the trustor receives income from the trust)

Who Should Consider a Trust?

Unfortunately, I can’t answer that for you. With so many possibilities for wanting a trust, to varying laws from state to state, and the significant tax and legal ramifications, there simply isn’t a right or wrong answer. The best advice I can give is to learn more about what trusts can and can’t do, and examine your situation to see if there are any potential benefits in creating a trust. If this is something you are more interested in, you really need to seek the advice of an estate planning attorney.

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Transfer by Contract

A transfer by contract is a fancy way to say the asset or policy has a beneficiary directly associated with it. Common items that transfer by contract are life insurance policies, retirement accounts, pensions, annuities, and so on. For example, when you purchase a life insurance policy, you also assign a beneficiary to receive the proceeds upon your death. This is the contract that allows your beneficiary to directly receive the benefit without having it go through probate.

One of the biggest mistakes people make is not keeping their beneficiaries current. Remember that 401(k) you enrolled in 10 years ago when you first started your job? Who did you assign as a beneficiary? Were you married or single? Have you had children since then? Are you now divorced? It is important to check on, and update your beneficiaries as things in your life change, otherwise you may end up giving something to someone who you didn’t expect or want to in the event of an untimely death.

The primary benefit of transferring assets by contract is that it is generally much faster than going through probate. Probate can take many months, while a transfer by contract can be completed in a few short weeks. In most cases, a death certificate needs to be provided with a claim form to be processed, and after verification the assets are released.

Transfer by Operation of Law

Some assets are governed by law and how the property is owned, but can vary by location. The most common example is when an asset is owned by more than one person. Some common types of ownership:

Joint Tenants With Right of Survivorship (JTWROS)
Example: Mary and Bill equally own a house as JTWROS. If Bill dies, Mary assumes 100% ownership. If Mary dies, Bill assumes 100% ownership.

Joint Tenants in Common (JTIC)
Example: Mary and Bill own a house as 50/50 JTIC. If Bill dies, His 50% ownership is passed on to his estate rather than to Mary. Likewise, if Mary dies, her 50% ownership is also passed on to her estate.

Intestate Death (death without a will)
Example: Mary is married to Bill. In some states, if Mary dies without a will, her assets will pass to Bill, as her husband, under the state laws where they live. Each state will have a system to determine the distribution. For example, assets could first go to a spouse, if there is one. If no spouse, the assets would go to the deceased’s children. If no children, the assets would go to the deceased’s parents, etc. Each state can have a different system for determining distribution. You should check with your state to determine how property passes upon intestacy.

One thing to remember: Because jointly owned assets are passed on to survivors under operation of law ‒ regardless of any other wishes you may have ‒ make sure you resolve any ownership issues during your lifetime.

Some Things to Consider

Going forward, if you have accounts with beneficiaries on file, make sure you check and see if the beneficiary is who you want, and make changes as necessary. Always review your beneficiaries after a major life change. If you are putting together a will, keep in mind how transfers by contract or law may negate what your wishes state in your will. This is where it can be very helpful to work with an attorney that is familiar with estate planning so that you can make sure there are no unexpected issues that arise upon your death.

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What a Will Is, and Isn’t

Wills can help facilitate the transfer of assets, but wills do not bypass the probate process, although the probate process will go faster with a will as opposed to without. A will is a legal document, but there is no master database in which the document can be retrieved. You will need to keep your will in an accessible place that your heirs can access. Wills can also help in defining new guardians for your children, but a will cannot assist with your potential disability or need for guardianship.

A Will Shouldn’t be a Static Document

One constant in life is change. When your personal situation changes your will may need to be updated as well. Minor changes to your will can be done via a codicil, which is just an amendment to the existing will. More substantial changes may have to be done through a replacement will. Review your will periodically to assess your situation and see if anything has changed that might warrant a change in your will. Some examples of events that could cause a change:

• A change in mind regarding beneficiaries
• Executor dies
• Change in family situation
• Change in the nature or size of assets
• Change in needs of the beneficiaries
• Moving to a new state

Keep Your Will in a Safe Place

One of the most important things regarding your will is to keep it someplace safe. If your only copy is burned in a fire or otherwise lost, it won’t do you any good at your death. The original should be kept in a fire-proof box in your home, or left with your attorney. You may think that another good option would be a safe deposit box at the bank, but be careful. In some states, when someone dies, their assets are frozen at the bank, including lock boxes. This could delay the ability for your heirs to get into the box and retrieve the will. It is a good idea to keep copies of your will there, but try to keep the originals somewhere more accessible by family members.

The Probate Process

Probate is the legal process to handle the disposition of assets at your death. If you die with a will, it will be submitted for legal clearance to distribute your assets. If you die without a will, the court will need to appoint a local attorney as your administrator. That attorney will oversee the administration of your estate (and charge a fee for doing so.) Regardless of whether or not you have a will, the probate process generally follows this path:

• Inventory and assess value of all property
• Locate and identify heirs
• Settle outstanding loans and liabilities
• File tax returns
• Distribute all property

Don’t Forget the Letter of Instruction

While a letter of instruction isn’t actually part of the will or even a legal document, it can be one of the most important pieces of your estate plan. The letter of instruction provides information for your will executor and your heirs to help facilitate issues regarding your death. Typically this letter will provide instructions as to where to find the will and other important documents such as life insurance policies.

This letter is also useful in that you can provide a list of your various bank and investment accounts, titles to property, burial instructions, or anything else that your executor or heirs should be aware of. Without a detailed record of accounts or letter of instruction, it can become a tedious process for your heirs to try and track down everything, and unfortunately, some may be overlooked and go unclaimed.

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