Beneficiary Designation vs Will

Financial Planning Estate Planning and the Fool
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I am right now working with an attorney to write a new will and the dialogue has got me thinking about the mechanics of carving up my estate. This may be more of a tax question than an estate planning question but any way here goes.

Consider a tax advantaged account such as a TIRA or Roth account being passed to an heir. On that account I can specify either:

  1. a human beneficiary, in my case my children (I blissfully have no spouse)
  2. my estate as beneficiary, in which case my will will direct that same account to that same child.
  3. no beneficiary at all in which case the asset will default to my estate and my will will direct that account to those same children.

I am certain in case 1, my kids would enjoy the tax advantages that come with the inherited account.

Not sure about cases 2 or 3. Any thoughts or perspective would be appreciated.

thx, bhm

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I’m sure most people will tell you to name your descendants per stirpes in the beneficiary designation, but I think there could be situations where 2 may make sense. No absolute answer because there are too many variables.

Keep in mind if you go to your estate, creditors can file claims against those assets. Do you want that?

Using #2 will cause a delay and a small cost associated with probate. #2 however would give you the opportunity to put assets into trusts for certain descendants or all under a certain age. Also, if you have lots of IRAs, naming your estate in all of them will aggregate assets. Again, lots of variables.

Mike

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Hi bhm,

I think it’s terrific that you are putting so much time and attention into your estate planning. It is truly an act of love for your children. I couldn’t convince my father to write a will until a few months before he started home hospice. (My mother, who died in 2012, had begged him for years to write a will.) It was like a scene from the movies. The attorney came to the house and brought witnesses along and my father signed documents from his bed. I have had a difficult time settling my father’s estate, but it could have been so much harder. Most of the complications have come from the inheritance tax charged by the state of PA.

One thing to consider is whether your heirs will use an estate attorney. My father named us explicitly as beneficiaries on his accounts. After some delay due to coordination among siblings, we each received identical accounts at the exact same time from each institution, exactly 1/4 of each holding. My estate attorney told me that if my father had named the estate as the beneficiary, it is fairly typical for an estate attorney to liquidate the accounts and deposit cash into the estate account. Everyone receives cash once the estate settles. Obviously there are pros and cons to this, depending on what the markets are doing and your heirs’ financial sophistication. My father’s taxable account held a large number of individual stocks, carefully chosen for dividend payments and diversification. Two of us appreciate this account and the other two siblings find it to be a huge headache. If you designate the estate as the beneficiary, find out exactly what your attorney would do with these accounts, in case your heirs use an attorney.

To give you a sense of timeframe, very much delayed by Covid closures: My father died last January. We received all of the TOD accounts by the end of July. That was the majority of the estate. Money from the sale of the house this past May is still sitting in the estate account. Because we are still dealing with issues with my father’s 2019 federal income taxes, it may be a while yet before the rest of the money is released from the estate account.

If you think your heirs might use an estate attorney, it would be very helpful for you to direct them to use the one with whom you are currently working. In some ways, the estate attorney made things more difficult for me and in other ways they made it easier. It was expensive, but I know that things are being done correctly and completely and I have legal protection.

HHP

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Per our estate planning attorney’s advice:

  • Beneficiaries of our IRA’s are descendants per stirpes.

  • All our other accounts (checking, savings, brokerage) are in our revocable living Trust, as was our house when we owned one. The Trust specifies beneficiaries and contingent beneficiaries, so none need be listed on the accounts, and aren’t.

  • Cars are not in the Trust, just in our own names. Apparently states make it pretty easy to transfer vehicle ownership to an immediate relative.

All that said, I have no first hand experience with how this will all pan out when the time comes. If my dad predeceases me, I’ll find out. All his assets are in his Trust, which specifies beneficiaries of descendants per stirpes, equal shares. The funds will go into springing Trusts, one for each adult child.

I’ll be the Trustee of my inherited Trust. A credit union trust department will be Trustee for my profligate brother’s Trust. (Originally Dad wanted me to be Trustee for Bro’s account, but I refused.)

Good luck!

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I’m sure most people will tell you to name your descendants per stirpes in the beneficiary designation, but I think there could be situations where 2 may make sense. No absolute answer because there are too many variables.

Keep in mind if you go to your estate, creditors can file claims against those assets. Do you want that?

Using #2 will cause a delay and a small cost associated with probate. #2 however would give you the opportunity to put assets into trusts for certain descendants or all under a certain age. Also, if you have lots of IRAs, naming your estate in all of them will aggregate assets. Again, lots of variables.

Mike

Ckelly - thank you for that advice, but while per stirpes is fine for many people’s situation but does not fit for what I want to do.

My daughter has two kids and my son has no kids. So under per stirpes, if my daughter dies first, her slice goes to my grand kinds which is fine. But if my son does first, he has no children so his slice goes into his estate and ends up god knows where. If my son goes first, I want his share to go to my daughter which ultimately will benefit my grandkids.

That said, I am looking at alternatives to accomplish what I want. I can’t list both son and daughter as primary with 50% to each because if one goes, the other gets 100% which again, if my daughter goes first, my son gets it all and my grandkids get zero.

This leads me to directing the assets into my estate when I can implement a more nuanced distribution. That is what led to my initial question about cycling through my will. Does that perhaps strip away the tax advantages of inheriting a Roth or a TIRA?

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That said, I am looking at alternatives to accomplish what I want. I can’t list both son and daughter as primary with 50% to each because if one goes, the other gets 100% which again, if my daughter goes first, my son gets it all and my grandkids get zero.

Let us know if you figure this out. We have a similar situation with wanting an initial split between my son and my wife’s sister, but the portion to the sister is intended more as a sort of emergency fund just in case and we would like any residual to go to my son. I haven’t figured out how to do that without creating a trust administered by someone else, who would dole out money to the sister if needed, but then pass the residual to my son when the sister passes. On top of which, the sister is in Canada which has different inheritance laws which seem like they will take a bite off the top.

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One thing to consider is whether your heirs will use an estate attorney. My father named us explicitly as beneficiaries on his accounts. After some delay due to coordination among siblings, we each received identical accounts at the exact same time from each institution, exactly 1/4 of each holding. My estate attorney told me that if my father had named the estate as the beneficiary, it is fairly typical for an estate attorney to liquidate the accounts and deposit cash into the estate account. Everyone receives cash once the estate settles. Obviously there are pros and cons to this, depending on what the markets are doing and your heirs’ financial sophistication. My father’s taxable account held a large number of individual stocks, carefully chosen for dividend payments and diversification. Two of us appreciate this account and the other two siblings find it to be a huge headache. If you designate the estate as the beneficiary, find out exactly what your attorney would do with these accounts, in case your heirs use an attorney. - HHP

Thank you for that lengthy reply. I know that took sime time to write and I appreciate the information and context. I paragraph I quoted above has some elements I want to ask about.

Re: After some delay due to coordination…

This IS a big concern of mine. My son and daughter have a highly strained relationship. It is likely my daughter would be highly responsive to Vanguards process. It is equally likely my son may be hard to find and even harder to get to follow through with paperwork. I absolutely don’t want inaction by my son to delay my daughter receiving her inheritance. So I am very interested in experiences such as yours, and if you could elaborate I would appreciate it. One option I am considering is to split my assets into multiple accounts with only one beneficiary on a given account.

Re: find out exactly what your attorney would do

I assume this concern is a result of the attorney being the executor. In my case, my daughter will be the executor with my significant other as contingent executor. In either case, my estate attorney is there to lend advice and assistance to the executor but has NO independent authority to do anything.

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Per our estate planning attorney’s advice:

- Beneficiaries of our IRA’s are descendants per stirpes.

- All our other accounts (checking, savings, brokerage) are in our revocable living Trust, as was our house when we owned one. The Trust specifies beneficiaries and contingent beneficiaries, so none need be listed on the accounts, and aren’t.

- Cars are not in the Trust, just in our own names. Apparently states make it pretty easy to transfer vehicle ownership to an immediate relative.

All that said, I have no first hand experience with how this will all pan out when the time comes. If my dad predeceases me, I’ll find out. All his assets are in his Trust, which specifies beneficiaries of descendants per stirpes, equal shares. The funds will go into springing Trusts, one for each adult child.

I’ll be the Trustee of my inherited Trust. A credit union trust department will be Trustee for my profligate brother’s Trust. (Originally Dad wanted me to be Trustee for Bro’s account, but I refused.)

Good luck! - YewGuise

Thanks. Good luck indeed. This estate project it turning out to be quite complex with lots of moving parts. I am slowly picking my way through the issues, but it seems each answer creates two new questions. Right now one of the foundational elements I am trying to nail down is the preservation of Tax advantages when inheriting a Roth or TIRA. Besides real estate, the rest of my assets are primarily Vanguard accounts, a taxable, a TIRA, and a Roth. The Roth is approaching seven figures and preserving its ten years of tax free growth for my heirs is really a big deal.

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Actually, descendants per stirpes would not go to your son’s estate if he predeceased you (with no kids of his own). Descendants per stirpes is not the same as 50% daughter and 50% son. Your IRA custodian may not let you designate per stirpes though.

Also, assuming your son survives you and gets half your account and then dies shortly later, he can give his share to anyone. Do you want that? IF not then you may want to run it through your estate and set up trusts.

Again, no size fits all. Talk to your lawyer.

Mike

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This IS a big concern of mine. My son and daughter have a highly strained relationship. It is likely my daughter would be highly responsive to Vanguards process. It is equally likely my son may be hard to find and even harder to get to follow through with paperwork. I absolutely don’t want inaction by my son to delay my daughter receiving her inheritance. So I am very interested in experiences such as yours, and if you could elaborate I would appreciate it. One option I am considering is to split my assets into multiple accounts with only one beneficiary on a given account.

Do exactly that. Split everything into accounts, each with one beneficiary. If your inattentive child doesn’t do the paperwork hustle, it’s their own problem.

As a data point, we recently had a three-generation family situation with TDAMeritrade where a grandparent died with a TOD (transfer on death) account. All family members were on the same page, and this even involved a disclaimer from the middle generation to the adult grandchildren on one branch. TDA was super responsive and the more than $1M account was transferred to the beneficiaries within two weeks of death and within 1 week of presenting the paperwork.

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bhm – I know this is a long one. I hope it answers all of your questions. I am happy to provide more clarification if needed.

Estate Attorney:

I should have said “find out what your attorney would recommend” not “what your attorney would do”.

I am the executor of my father’s estate, but I hired an estate attorney to help me. (The one who prepared my father’s will) That particular attorney would not work with me in an hourly, consultation-only mode. Their office charges a percentage of the entire estate (including TOD accounts but excluding life insurance). These are the same assets that must be formally accounted and are taxed by the state of PA.

While I was/am technically still in charge, there were certain things it was “strongly suggested” I do the attorney’s way. For example, my parents had several hundred paper savings bonds that listed each other as the beneficiary. Since both of my parents are deceased, the savings bonds were part of the estate. Some of these were I Bonds earning decent interest rates. I wanted to find a fair way to divvy these up, but the attorney said it would be easiest to cash them all out, put the proceeds in the estate account, and pay the taxes from the estate account. Legally, that is the least risky way to divide the bonds in a fair way and it takes less time than figuring out how to divide and retitle them all. The logic made sense to me.

If accounts do not have designated beneficiaries, my attorney recommends the executor liquidate the account, put the money into the estate account, and pay the taxes from the estate. That protects the executor from legal action by other beneficiaries if stock markets drop. I suggest you ask your estate attorney how they would advise your daughter to proceed if your taxable and tax-deferred accounts listed the estate as the beneficiary. (And Vanguard may have their own rules for what they will do.)

Even though I am in charge as the executor, my attorney has Power of Attorney to represent me in certain transactions. They can act independently but they have always consulted with me before acting. In most cases I still do/did most of the work.

My attorney has a lot of experience and a good reputation. Their office used to provide hourly services for settling estates, but they claim they ended up spending a lot of time correcting things that clients did incorrectly. They prefer to provide guidance, have more control and make sure things are done correctly the first time. From speaking to friends who have served as executors, I understand more and more attorneys are using this model.

I recommend you ask your attorney what their office would do if your daughter came to them for help. Will they work with her on an hourly basis? Will they want to take charge and earn a percentage fee on the estate?

Explicitly ask your attorney “what will my daughter have to do if my son can not be located or will not cooperate”? Document this for her. The actions might be state specific.

And I hope that your daughter lives in the same state that you do. Some states require the executor to live in the same state. Some require out-of-state executors to hire representation within the state. Those are other questions you might need to ask.

Estate Bills:

One of the challenges I had was that my father had almost all of his accounts with TOD designations. There were bills to pay and I did not have access to funds (because of waiting on siblings). I ended up loaning about $15,000 to the estate to pay bills. I was reimbursed from the estate account once the house was sold. Make sure your daughter will have access to cash to pay bills. Life insurance is paid quickly with minimal hassle. Some people use joint checking accounts for this purpose.

Siblings:

Your son could make things difficult for your daughter. My brother was not uncooperative. His job was seriously restricting time off due to Covid and he could not make personal calls during business hours. On top of that, when he managed to take time off from work, he made several mistakes that required him to fill out forms more than once, make phone calls more than once, etc. Thankfully my sister-in-law was happy to do as much as she could to help.

If you name both of your children as beneficiaries on your IRA, they will both have to call in to Vanguard, prove their identity, and set up accounts before Vanguard will fund either of the inherited IRAs. I have no idea what process is required if one of the beneficiaries refuses to cooperate.

Also, if you are required to take an RMD on the year of your death, and have not done so prior to your death, your beneficiaries will be required to take your RMD the first year. One of the confusions for us was to figure out which beneficiary(ies) should take the RMD. If a beneficiary calls in to Vanguard to ask about the RMD, they will tell you the total amount that needs to be withdrawn from the inherited accounts. They can not tell any of the beneficiaries (even the executor) what any of the other beneficiaries have done, so unless you can speak with the other beneficiaries, you have no idea if anyone else has taken the RMD. I believe one of us took 1/4 of the required amount and the other three of us each took out the full RMD to be safe. That is another area where coordination was required.

Based on my very limited experience, separate accounts with single beneficiaries would allow your daughter to get access to her inherited accounts more quickly than having to coordinate with one or more other beneficiaries. Your estate attorney would know best.

One of the first duties as executor is to provide legal notification to all parties that have been named in the will. The law office took care of this for me. Your daughter will be required to provide legal notification to your son. If she does not have his address, she might need advice from a law office on how to handle this.

I can’t comment on taxes other than to say that neither Fidelity (inherited 401K) nor Vanguard (inherited IRA) provided good documentation to the beneficiaries on the rules for withdrawal from the tax-deferred inherited accounts.

Good luck! I hope this helps you prepare for your next meeting with your estate attorney.

HHP

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But if my son does first, he has no children so his slice goes into his estate and ends up god knows where. If my son goes first, I want his share to go to my daughter which ultimately will benefit my grandkids.

Making a beneficiary designation now does not prevent you from changing it in the future.

So you could name them as 50/50 beneficiaries now. Then if your son passes before you, you can change the beneficiary designation to be 100% to your daughter. If your daughter were to predecease you, you could specifically name your grandchildren in her place. So it’s not even necessary to rely on the per stirpes designations (although they’re fine if they work for your situation).

Estate plans are not set in stone. They can change as your situation changes. Do what is right for now, and revisit the plan from time to time and update as needed.

–Peter

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Actually, descendants per stirpes would not go to your son’s estate if he predeceased you (with no kids of his own). Descendants per stirpes is not the same as 50% daughter and 50% son. Your IRA custodian may not let you designate per stirpes though. - Ckelly

Thank you for that. I have been do a lot of reading and clearly misunderstood that detail. That makes per stripes worth of continued consideration. Vanguard does permit per stirpes according to their website but ultimately I will have to call them to discuss. and even then I am not sure I want to rely on what some CSR on the phone tells me.

One question I have regarding per stirpes that you or someone else may have experience with the mechanics of my heirs making claim. As I understand it, my beneficiary will simply be “descendants per stirpes”. Since no specific names are stated, how does Vanguard know the extent of my my family tree? My two kids contact them and say here we are, so vanguard gives each 50%. How does Vanguard know there is not a third kid somewhere that should get a slice?

Of if my daughter is deceased. My SIL gets in touch with Vanguard and says bhms daughter is deceased, I am her husband and our two kids are A and B. So how does VNG know that SIL is actually my daughters husband and the two names, A and B he gives them, were actually born to my daughter? Not that he would would do anything nefarious but more to know what sort of hoops need to be jumped through to finalize a vague “per stirpes” distribution.

Also, assuming your son survives you and gets half your account and then dies shortly later, he can give his share to anyone. Do you want that? IF not then you may want to run it through your estate and set up trusts.

Again, no size fits all. Talk to your lawyer.

Mike

Yes, lawyer for sure. All these questions and research is so I can be best prepared for my next session with the estate attorney. Thanks for your help.

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>>This IS a big concern of mine. My son and daughter have a highly strained relationship. It is likely my daughter would be highly responsive to Vanguards process. It is equally likely my son may be hard to find and even harder to get to follow through with paperwork. I absolutely don’t want inaction by my son to delay my daughter receiving her inheritance. So I am very interested in experiences such as yours, and if you could elaborate I would appreciate it. One option I am considering is to split my assets into multiple accounts with only one beneficiary on a given account.<<

Do exactly that. Split everything into accounts, each with one beneficiary. If your inattentive child doesn’t do the paperwork hustle, it’s their own problem. - daryll44

==============================

Yep, I am leaning towards split accounts with one beneficiary.

Secondary on both accounts can point to daughters kids. Simpler than per stirpes, no need to document a family tree to the satisfaction of Vanguard.

Also avoids the issue of my son is deceased and with no kids, his per stirpes slice should go to my daughter. But how do you establish he doesn’t have any kids of his own, especially since he is dead and can’t sign anything to that effect? And for all I know there could be an illegitimate kid or two some where.

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Good luck! I hope this helps you prepare for your next meeting with your estate attorney.

HHP

Thank you HHP for all that advice. I will just quote your closing paragraph and say that all you wrote was quite informative and helpful in preparing for my next meeting.

The consensus seems to be to use split accounts with separate beneficiaries as the way to avoid coordination between siblings that could delay distribution to my daughter.

And thank you for advising about discussing attorney fees that may come into play when my attorney provides services to my daughter in her role as executor. In my first meeting I asked about probate costs and he said $3,500 if we had to go through probate. Right now the way things are headed is the only things that will pass via my will are personal property and 100% to my daughter so nothing to adjudicate. But the $3,500 was for court expense, I never inquired about his fee which I hope would be a straightforward and reasonable hourly rate instead of any percent of estate non sense. I will be sure to nail this down.

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>>But if my son does first, he has no children so his slice goes into his estate and ends up god knows where. If my son goes first, I want his share to go to my daughter which ultimately will benefit my grandkids.<<

Making a beneficiary designation now does not prevent you from changing it in the future.

So you could name them as 50/50 beneficiaries now. Then if your son passes before you, you can change the beneficiary designation to be 100% to your daughter. If your daughter were to predecease you, you could specifically name your grandchildren in her place. So it’s not even necessary to rely on the per stirpes designations (although they’re fine if they work for your situation).

Estate plans are not set in stone. They can change as your situation changes. Do what is right for now, and revisit the plan from time to time and update as needed.

–Peter

Yep, changing if necessary was and is my plan. I had pretty much had everything figured out when before I went to see the attorney and had even written down how each asset was to be handled, beneficiaries on qualified accounts and vehicles, TOD’s on taxable account and real estate. Will only to appoint executor, cover personal property and any pour over. Yep, I had thought it through and the attorney even complimented me on how well prepared and well versed I was compared to his typical client.

Yep, my well thought out plan hangs together real good as long as my daughter is around when I pass.

But then he started what if’ing me…

He starts with, assume you are incapacitated, not dead, but not capable of making any changes to your estate plan.

“What if your daughter predeceases you?” Those beneficiary designations will send her half to your son, do you want that? I said no and said her share should go to her husband. He then what if’ed me about the husband re-marrying or having other ideas about what to do with they money that isn’t 100% for grand-kids. That is when he brought up “per stirpes”. But after further research and airing that out on this board, in my next meeting I am going to push hard for split accounts and single beneficiaries and see what what says.

He then what if’ed the awful prospect of my daughter, and the grand kids all dying in a common mishap, then what? That left me thinking would I want it everything aimed at my daughter (1/2 the Vanguard and 100% of my personal property and real estate) to go to SIL. He is a good man, a really good father and husband but still???

Then the attorney, what if’s my daughter, her husband and both grandkids all predecease me, do I want it all to go to my son? No, but maybe more than before but not 100%. I should add I am an only child so there are no brothers, sisters, nieces or nephews to consider.

I had it all figured out until the attorney upset my nice tidy little world by asking these questions.

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Ah yes, the “ultimate disaster” questions. Good to have a charity or two in mind for that highly unlikely, but not impossible, scenario.

What did your lawyer say about “surprise” grandchildren? IIRC, the boilerplate language of my dad’s and my documents specifies “lawful heirs,” which means marriage or adoption required.

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One question I have regarding per stirpes that you or someone else may have experience with the mechanics of my heirs making claim. As I understand it, my beneficiary will simply be “descendants per stirpes”. Since no specific names are stated, how does Vanguard know the extent of my my family tree? My two kids contact them and say here we are, so vanguard gives each 50%. How does Vanguard know there is not a third kid somewhere that should get a slice?

I’m not familiar with the Vanguard form. Here is a link to Schwab’s form that explains it. https://www.schwab.com/resource/ira-beneficiary-form

The form provides plenty of details that can be filled in on the beneficiaries. You may also be able to attach and send in a family tree. At your death, your custodian will have an estate team that will work to verify the correct beneficiaries. If they screw up, they may be liable. So, they try their best not to. Again, the more info you can give them the better.

My dad died and left his IRA to my kids. Pretty easy process. They fill out claim forms etc and moved stuff to inherited IRAs.

Mike

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>>One question I have regarding per stirpes that you or someone else may have experience with the mechanics of my heirs making claim. As I understand it, my beneficiary will simply be “descendants per stirpes”. Since no specific names are stated, how does Vanguard know the extent of my my family tree? My two kids contact them and say here we are, so vanguard gives each 50%. How does Vanguard know there is not a third kid somewhere that should get a slice?<<

I’m not familiar with the Vanguard form. Here is a link to Schwab’s form that explains it. https://www.schwab.com/resource/ira-beneficiary-form

Mike

Thank you again Ckelly7279. See that Schwab form clears up another misunderstanding I had.

My question was “How does Vanguard know the extent of family tree”. The answer is “because I tell them up front”, via Vanguards version of this form.

My misconception was rooted in thinking “per stirpes” freed me from explicitly listing every potential heir. I thought that it protected me in the sense that if somehow I neglect to maintain my beneficiary designations, eg forget to add the birth of a child or grandchild. I thought in that case, the per stirpes beneficiary designation would swoop in and allocate to that “missing” child or grand child at distribution time. But that was my error. If I don’t list a descendant, then that person does not receive any distribution. In that sense, I still must maintain the beneficiary chain, even when I am old and demented. All per stirpes does is provide a methodology whereby I don’t have to specify percent allocations.

This is a big step forward for me in understanding this option. I am much better grounded than I was, so thank you again for clearing that up.

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The different custodians can work differently!!!

I looked at the Schwab form. In there I found Select either a per stirpes or a per capita distribution option. Only one option may be selected per account.

I looked up the Fidelity form. Fidelity has per stirpes for each individual beneficiary.

https://www.fidelity.com/bin-public/060_www_fidelity_com/doc…

I tried to find a form for Vanguard but only came up with a link that required an account.