Estate planning fundamentals: Beneficiary and distribution decisions

This is the second installment in a three-part series, designed to help you understand estate planning fundamentals from creating the documents to implementing the plan. In this second part, we focus on the distribution of your assets — who should receive them and how.

Part one: Key documents and fiduciaries Read
Part three: Implementing your estate plan Read

One of the most significant aspects of estate planning is identifying the beneficiaries under your estate plan and deciding how and when they should receive assets. There is no “right” answer to these questions that fits every person and every situation, which can be both liberating and terrifying at the same time. However, once you determine the “who” and understand the various options for the “when and how,” the overall plan can come together in a cohesive and rewarding way.

Your beneficiaries:

In the context of estate planning, beneficiaries are individuals or entities designated to receive assets from you at your death. Beneficiaries can include family members, friends, pets, charities, or any combination of those.

Creating a list of people and causes that are important to you can be a great place to start when determining your beneficiaries. While many people automatically think they should focus solely on their family members — e.g., spouse, children, siblings, nieces and nephews — it is important to consider all of the individuals and causes in your life that you may want to benefit at your death. This is particularly important for those who may not be married or have children, or who aren’t particularly inclined to benefit their families.

As noted above, there is no right answer to the beneficiary question, but it instead comes down to who you want to receive your assets at your death.

The disposition:

Once you know who you want to benefit at your death, the next questions to consider are how and when they benefit. Given the many different ways to dispose of your assets, here are a few questions that may help you decide what will work best for you and your beneficiaries:

• Are there particular assets you want specific beneficiaries to receive? For example, is there a piece of artwork that a friend has always loved or is there an interest in a family business that you want a child working in the business to receive?
• Do you want to allocate specific dollar amounts to any individuals or charities before dividing the balance among other beneficiaries?
• If you have multiple beneficiaries you want to share in all of your assets, do you want them to receive specific percentages or certain dollar amounts?
• Do you want any of your assets to be held for a specific charitable purpose at your death? For example, is there a scholarship at your alma mater that you want to fund or a particular charitable purpose you want to support at your favorite charity?
• Do you want any of your assets to be held for a specific purpose for an individual or a group of people at your death? For example, do you want to create a trust that will fund education expenses for a group of individuals such as grandchildren, nieces and nephews, or children of close friends?
• If you are married with children, would you like assets to be available for the needs of your surviving spouse, with the remaining assets passing to your children only after the deaths of you and your spouse, or should your children have access to some of your assets immediately?
• Would you like assets to pass to a multigenerational trust that can help protect those assets from transfer taxes and creditors?
• If you create a trust for a beneficiary, should the trust terminate over time with withdrawal rights (e.g., 1/3 at 30, 1/2 at 35 and all at 40) or should the trust last for the beneficiary’s lifetime?

While this is not an exhaustive list of questions, it is a starting point to consider who and what are important to you for your estate plan. Contemplating these questions may lead to more questions, ultimately getting you to the plan that you want for you and your beneficiaries.

Trust terminology

If you decide to retain assets in trust, providing your trustee with guidance regarding how you want trust property to be distributed to your beneficiaries is an important element of your estate plan. Some words used in trust agreements can have a very specific legal meaning, while others can be a personal expression of your intent. As you work with your estate planning attorney, it may be helpful to understand the meaning of certain terms.

Health, education, maintenance and support

These words are among the most common used to guide a trustee in making income or principal distributions. Because they can provide a favorable estate tax result when applied to a beneficiary who is also serving as trustee of the trust, they are used frequently by attorneys and have been examined by courts across the country. While specifics can vary from state to state, the following examples provide general guidance of what each of those words may include:

• Health: Routine health care examinations; necessary surgeries; dental care; eye care; emergency medical treatment; psychiatric and psychological treatment; health insurance
• Education: Elementary, secondary and college education; graduate, post graduate and professional education; technical or vocational education; support of the beneficiary while in school; career training; study abroad programs
• Maintenance and support: Mortgage or rent payments; utilities; property taxes; food; accustomed patterns of vacation; home maintenance; existing programs of life and property insurance

Other commonly used terms

Many people want to broaden the distribution standard of “health, education, maintenance and support” so might use some of the following terminology in their documents:

• Comfort: The trustee will generally give weight to the desires and habits of the beneficiary within the context of the beneficiary’s standard of living at the time the trust was created.
• Best interests, welfare and/or happiness: A standard giving the trustee broad powers, but also implying a responsibility to understand the beneficiary’s needs and lifestyle.
• Complete discretion of the trustee: The broadest standard, under which the trustee should be mindful of applying consistent policies of distribution to all beneficiaries.

Under all of the distribution standards, you have the ability to craft specific uses for trust property – e.g., to purchase a residence or start a business. Since the meaning of these terms can sometimes be unclear and vary by state, detailed descriptions guiding the trustee can be useful. However, it is important to understand that whatever is written in the trust document is binding on the trustee. The proper balance between express direction and flexibility is the ultimate goal, and should be discussed with your attorney.

Conclusion

A comprehensive estate plan requires careful consideration of your beneficiaries and the disposition of your assets. By addressing these important questions, you can ensure that your wishes are honored and that the people and causes important to you are taken care of after your death. In addition, regularly reviewing and updating your estate plan will help you and your plan adapt to life changes and maintain clarity. It is always important to work with a qualified estate planning attorney to address your particular intentions and to draft your personal estate plan.

Theresa Marx is the director of wealth planning and a senior wealth strategist for CIBC Private Wealth in Chicago, with over 20 years of industry experience.