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Understanding the basics of estate planning 1
It’s important to have an estate plan. You want to make sure the
assets you’ve worked so hard to accumulate during your lifetime
go to the people or organizations you care about. Estate planning
can be a complex process, but you can make it easier with the
support of capable, experienced professionals.
This guide presents an introduction to This guide is provided for educational
estate planning so that you can better purposes only and is not intended to
understand what’s involved. You’ll learn be legal or tax advice. The information
more about: provided was accurate at the time of
• Sizing up your estate.
publication and is subject to change
without notice. We recommend that
• Tax laws that affect your estate. you consult an estate planning attorney
• The documents you’ll need. or a tax advisor to discuss how current
laws apply to your situation.
• Some common estate plan designs.
• How your assets will transfer when
you die.
• Designating beneficiaries.
• How to get started on your plan.Why estate planning is important
Having a comprehensive estate plan in • Ensuring all of your assets, including
place can help you feel more confident those that pass by beneficiary
about the future and that your loved designation (e.g., retirement accounts
ones will be taken care of. It can help and life insurance policies), will be
you achieve a variety of goals and distributed according to your wishes.
objectives, including: • Minimizing taxes and expenses.
• Providing support and financial stability
• Ensuring that individuals you choose
for your spouse. can make decisions on your behalf in
• Preserving assets for future generations. the event of your incapacity.
• Supporting a favorite charity or
other worthy cause.
1Size up your estate
In this section, we’ll Before you can establish a plan for your • Whom do you want to leave your
help you:
estate, you must first consider what financial assets to?
1. Identify your goals.
you hope to achieve with any assets • Are there specific assets you’d like
2. Set a direction for you distribute.
your plan. to give to specific individuals?
3. Evaluate your assets • Are you concerned about trying to
to establish the What are your goals?
approximate worth protect assets from a divorced spouse
of your estate. Here are some questions you should ask or a beneficiary’s future creditors?
yourself to help define your estate planning
• If your beneficiaries are different ages,
goals and objectives before meeting with
are you concerned about the timing
an attorney. Use the space provided to
of distributions to them (e.g., second
write down answers or additional thoughts
marriage situations, beneficiaries of
so that you can share them with your
varying generations)?
attorney later.
• Do any potential beneficiaries have
• Are you concerned about whether your specific needs that you’d like to meet?
heirs have the ability to manage or
• Do you need succession planning for
protect your wealth?
a family business?
• Do any of your family members have
special needs?
List the objectives you have in mind for your estate
2Evaluate your assets While you may have already given us an
accounting of most of your assets, we
Your estate includes everything you
encourage you to complete the worksheet
own or anything you could have an
on page 4 and have it nearby during your
interest in, including investments, such
consultation. You can also keep copies of
as individual stocks, bonds, and mutual
this worksheet on hand to help your heirs
funds; retirement accounts; your home and
identify what you may own.
other real estate; business interests; and
personal property. It also encompasses As you evaluate your assets, here are a
assets that you may not typically think couple more questions to ask yourself:
of, such as life insurance policies, certain
• Do you expect a significant change in
annuities, certain trusts, and joint accounts
you own with your spouse or with your assets, such as an inheritance?
someone else. • Do you have an interest in any trusts?
3Valuing your estate* Asset category In your name In your spouse’s name Owned jointly** Taxable accounts $ $ $ Retirement accounts Life insurance Annuities Personal residence Other real estate Personal property (cars, furniture, jewelry, artwork) Business interests Other Subtotal $ $ $ Minus debts Total $ $ $ Date **This worksheet is intended to provide only an estimate of your estate value; you should not rely on it as an exact accounting. **Indicate if the joint owner is someone other than your spouse and if any of the assets are community property. The following states are community property states and as such have different rules for ownership and transfer upon death: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have mandatory systems; Alaska and Tennessee have optional systems. . 4
Gain insight into taxes
In this section, you’ll find Now that you know your goals and you’ve executor makes an election on your
information to help you:
evaluated your assets, it’s important to federal estate tax return after you die.
1. Learn more about
understand taxes—which could have a This transferred amount is known as the
federal and state
taxes that can affect significant impact on how much you pass “deceased spousal unused exclusion
your estate. to your heirs when you die. amount” (DSUEA).
2. Take steps to
minimize the tax Your exemption amount, in addition to any
liability for your estate. Federal transfer taxes that
may affect your estate DSUEA, may be used to exempt transfers
during your life or on your death from
There are three distinct but related federal federal estate tax and gift tax (both taxes
transfer taxes: estate tax, gift tax, and are unified). But any transfers beyond
generation-skipping transfer (GST) tax. these amounts may be subject to the tax
All of these taxes could have an impact on rate in effect for that year.
the amount passing to your beneficiaries,
depending on the value of your estate.
Let’s take a look at each one. Key terms
Exemption amount: The amount exempt
Federal estate tax from federal estate and gift taxes ($11.4
The federal estate tax may be imposed million per decedent in 2019)* and
on the value of your taxable estate at the sometimes referred to as the “unified
time of your death. Each U.S. decedent can credit,” “basic exclusion amount,” or
transfer a set dollar amount of assets free “exemption equivalent.”
of federal estate tax. This amount, known
Deceased spousal unused exclusion
as the “exemption amount,” is $11.4
amount (DSUEA): The portion of the
million per U.S. decedent in 2019*.
unused exemption amount that is portable
You should note that, in addition to the and can be transferred to a surviving
exemption amount, there’s also what’s spouse by election on the federal estate
known as the unlimited marital deduction, tax return (IRS Form 706).
where a spouse can transfer any amount of
assets to a surviving spouse free of federal
estate tax (special rules apply to spouses
who are not U.S. citizens).
It’s important to remember that for
decedents who died in 2011 or after, any
portion of the exemption amount that
goes unused is considered transferable
or portable. As detailed on the next page,
the unused amount can transfer to your
surviving spouse only, as long as your
*Numbers adjusted for inflation annually.
5More on portability You should also note that portability
Let’s take a closer look at portability, or the doesn’t carry over to future marriages,
ability to use any “leftover” amount of a a rule intended to avoid the accumulation
decedent’s federal estate tax exemption of unused exemption amounts. Sticking
amount, using the following example: with our previous example, review the
following scenario:
• A husband dies in January 2019.
He’s survived by his wife, and had • A husband dies in January 2019.
used only $2 million of his $11.4 million He’s survived by his wife, and had
exemption amount. used only $2 million of his $11.4 million
exemption amount.
• The executor must elect portability on
the husband’s estate tax return (IRS • The executor must elect portability on
Form 706). As a result, the husband’s the husband’s estate tax return (IRS
estate will have to file an estate tax Form 706).
return, regardless of the estate’s value. • The wife now has a total exemption
• The wife now has a total exemption amount of $20.8 million (this includes
amount of $20.8 million (this includes her $11.4 million exemption in addition
her $11.4 million exemption in addition to her deceased husband’s $9.4 million
to her deceased husband’s $9.4 million DSUEA).
DSUEA). • The wife remarries.
• Her second husband dies.
• Because the wife remarried and survived
the second husband, her exemption
amount remains $11.4 million (it doesn’t
include the original husband’s unused
$9.4 million DSUEA).
6Federal gift tax Generation-skipping transfer (GST) tax
This tax is imposed when you make gifts This tax may be due—in addition to the
in your lifetime that total more than the estate or gift tax—at the highest federal
exemption amount. estate tax rate (40% in 2019) when you
transfer assets to someone who is two or
Keep in mind that there are gifts you more generations from you. Remember
can make that do not count against your that, if the beneficiary is not related to you,
exemption amount. Using the annual the tax may be due if that person is more
exclusion gift, you can transfer up to than 37½ years younger than you.
$15,000 in 2019 ($30,000 for a married
couple)* to an unlimited number of people Here are two examples of when the GST
each year without incurring the gift tax. In tax may apply:
addition, you can give unlimited gifts to • A grandparent skips his or her child and
your spouse (special rules apply to spouses makes a gift to a grandchild.
who aren’t U.S. citizens), contribute to • A grandparent sets up a trust for a
charitable organizations, and pay medical grandchild when his or her parent is
or tuition expenses for any person, as long still alive.
as your payments are made directly to the
medical provider or educational institution. The GST tax has exemptions similar to
Please note that a gift tax may be payable the gift tax. You should consult with
at the state level. your tax advisor before making gifts to
younger generations.
The gift and estate taxes are unified—so
any portion of your exemption amount
not used during your lifetime for gift tax
exemptions can be used by your estate at
the time of your death.
*Numbers adjusted for inflation annually.
7Federal exemption amounts and State transfer taxes that may
tax rates for 2019 affect your estate
Estate tax $11.4 million* In addition to federal transfer taxes,
40% your estate or beneficiaries may have to
pay a similar form of state transfer tax,
Gift tax $11.4 million* depending on where you live.
40%
States may impose a tax in the form of
GST tax $11.4 million* a gift tax, estate tax, inheritance tax, or
40% a combination of these. Generally, state
estate and inheritance taxes are deductible
*Scheduled to be adjusted for inflation annually. on your federal estate tax return.
A note on portability: Portability only Estate taxes on the state level
applies to the estate and gift tax exemption Rates range from 0% to 20% and taxes are
amount—it doesn’t apply to any unused levied on your taxable estate before assets
GST tax exemptions. Therefore, reliance on are distributed to the beneficiaries.
portability may not be appropriate for some
families, specifically those families who are Inheritance taxes
leaving assets to grandchildren or further Rates range from 1% to 18%. These rates
descendants, or those who would like to may be progressive and are determined
do generational planning. by the amount of property received by the
beneficiaries and their relationship to you.
Direct descendants, for example, may pay
one rate, whereas other beneficiaries may
pay a higher rate.
8Why the gift tax is important • Give an unlimited amount to your
spouse if he or she is a U.S. citizen, or
A basic goal of estate tax planning is to
up to $155,000 in 2019* to a spouse who
transfer as much of your property with
isn’t a U.S. citizen.
as little taxation as possible. One way to
do this is to give money away during your • Donate an unlimited amount of your
lifetime. Gifting can give your planning a assets to qualified charities during your
purpose, and also ensure that assets are lifetime or upon your death.
no longer in your estate and vulnerable to • Contribute to a Section 529 college
federal or state transfer taxes. By making savings or prepaid tuition plan by
lifetime gifts, you remove not only the making a contribution of up to five
gifted assets from your estate but also the years of annual exclusion gifts (in 2019,
future appreciation of those assets. $75,000 if you’re single or $150,000
if you’re married)* per person. This
Here are some ways to transfer assets to
requires you to make an election on
relatives, friends, or worthy causes without
a timely filed federal gift tax return. If
incurring taxes:
you use this option, you can’t make any
• Take advantage of annual exclusion additional annual exclusion gifts to the
gifts by giving any number of people up same person for that five-year period.
to $15,000 a year in 2019 ($30,000 for a
married couple)*. For example, you could Remember that even if you make a
give away $15,000 a year to each of your taxable gift, you don’t owe taxes until
three grandchildren, reducing your estate you exhaust your exemption amount.
by approximately $45,000 each year. However, you may be required to file a
federal gift tax return (IRS Form 709)
• Pay for tuition or medical expenses
even if no tax is due. Check with your
as long as you make payments directly
tax advisor.
to the medical provider or educational
institution. You can transfer an unlimited
amount in this manner.
*Numbers adjusted for inflation annually.
9What documents do you need?
In this section, you’ll Now that you know your goals and What’s probate? When you die, whether
find information to help
understand estate taxes, let’s learn about or not you have a will, your estate could
you understand:
the types of documents you can use to go through a process called probate that
1. What documents
you can use to carry carry out those goals—typically a will or manages, settles, and distributes your
out your estate plan. a trust. property according to the terms of your
2. How a trust might fit will or intestate law. This process is
into your estate plan. It’s important to keep in mind that your governed by state law. The simplicity,
estate planning documents don’t always costs associated with, and timeliness of
control how your assets get transferred. probate will vary from state to state. An
You’ll learn in the sections ahead that attorney in your state of residence will be
current laws, titling of assets, and able help you learn what challenges your
beneficiary designations will also state’s probate process may present.
determine where your assets go.
The role of a will What if I die without a will? If you die
without a will, you die intestate. Your
The most common estate planning estate is then distributed according to
document is a will (also referred to as a the intestate laws of the state in which
Last Will and Testament). A will lets you resided. These laws typically are
you direct how your assets should be designed to reflect what most people want
administered, to whom—and under what to happen, such as caring for immediate
circumstances—your assets should be family. However, there’s no guarantee that
distributed, and who should manage your the distribution of your assets will reflect
assets after your death. your personal wishes.
10The role of a trust There are two main types of trusts,
revocable and irrevocable.
When you establish a trust, you create a
legal arrangement through which assets • Revocable (living) trusts are created
are held for a beneficiary. A trustee is during the grantor’s lifetime and
designated to manage the assets according can generally be changed or revoked
to the terms in the trust documents. You at any time while the grantor is still
can provide direction about how the trustee living. When the grantor dies, however,
should manage the assets, and under what the trust becomes irrevocable. The
terms the trustee should distribute them. grantor often serves as trustee during
his or her lifetime.
The terms of the trust can be tailored to
• Irrevocable trusts are created during
satisfy your goals and any concerns you
the grantor’s lifetime or upon his or her
have, as well as meet the needs of your
death under the terms of a will or another
beneficiaries. Here are the parties usually
trust. Typically, these types of trusts
involved in a trust:
can’t be changed or revoked. For the
• Grantor: The person creating the trust most part, irrevocable trusts are created
(also called settlor, creator, or trustor). for the benefit of individuals or charitable
• Beneficiary: One entitled to receive organizations.
part or all of the property under the
While trusts are often used as part of
terms of the trust, either now or in the
a plan to minimize or eliminate transfer
future. A beneficiary can be an individual
taxes, there are also other reasons,
or an entity.
unrelated to taxes, to establish a trust
• Trustee: The person or company that while you’re alive or to create one upon
holds the legal title to the assets in the your death. Because the circumstances
trust and is generally responsible for for you and your beneficiaries are unique,
managing and distributing the assets in it’s important to talk with an estate
accordance with the terms of the trust. planning attorney about whether a trust is
appropriate for your estate plan.
11When to use a revocable trust When to use an irrevocable trust
In most estate planning instances, it’s You can use an irrevocable trust for a
important to have a will. You may come variety of reasons, including generational
to a point when you need to decide tax planning and incentives for
whether a will is enough or if you need beneficiaries. Here are some additional
to create a revocable living trust as well. situations where you may choose to create
Many factors will help you determine an irrevocable trust:
whether you need a revocable living trust. • You have a child with special needs
The probate process in your state of who can’t financially care for himself
residency, your age, and the location of or herself.
your assets are just a few examples.
• You have concerns that your beneficiary
A revocable living trust works in may not be able to effectively manage
coordination with your will. In fact, it his or her inherited assets.
can often act as a substitute, because • You’d like to try to protect the assets
it directs how your assets will be from a divorced spouse or any future
administered and distributed during creditors a beneficiary may have.
your lifetime and after your death. And
a revocable living trust, much like a will, • You want to provide a structure for how
can help you accomplish some of your your beneficiary receives the assets
estate tax planning. (e.g., when, how, and for what purpose).
• You’d like to do generational tax planning
Specifically, a revocable living trust to minimize the amount of estate taxes
can help: that may have to be paid when the
• Ensure more seamless management beneficiary dies.
of your assets in the event you become • You want to ensure that the trust
incapacitated or are unable to manage assets go to specific beneficiaries
your financial assets. (i.e., individuals or charities).
• Ensure that your estate plan is kept
private and not made a matter of You can design trusts to be as flexible or
public record. as restrictive as you want; you can have
them last for the life of your beneficiaries
• Avoid your state’s probate process.
or for a shorter period of time. Work with
• Avoid probate if you own real estate in a qualified estate planning attorney to
more than one state (when you only develop a plan that meets your goals.
have a will, you’re required to have it
probated in each state in which you
own real estate).
12How your assets transfer
We’ve sized up your estate, learned about Trust: Assets transfer according to the
taxes, and reviewed the documents you’ll terms of a trust that was established prior
need. Next you should understand how to death.
your assets will transfer after your death. Will: Assets not passed on by terms
What happens will depend on several of ownership, a named beneficiary, or
factors, including the type of asset, a trust will pass under the terms of
how the asset is titled, and federal and your will. Typical assets may include
state law. Not all of your property is personal property, and assets titled in
automatically controlled by your will, which your individual name and as tenants
is why it’s so important to discuss with in common.
your advisor how your assets are titled and
who your beneficiaries are.
Titling of your assets: If you have a
Generally, assets can be passed to revocable living trust, you should speak
beneficiaries in the following ways: with your estate planning attorney to
Ownership or title: If you have assets determine whether it’s prudent for you to
that are held as joint tenants with rights title your assets in your trust’s name. By
of survivorship or tenants by the entirety, titling all of your assets in the name of your
the assets will automatically go to the revocable living trust, you may be able to
surviving tenant. Note that assets titled as avoid probate and carry out your planning if
tenants in common will transfer according you become incapacitated or disabled.
to your will.
Beneficiary designation: Transferable
assets such as retirement accounts, life
insurance, and annuities pass on to a
person, persons, or entity named on a
beneficiary designation form. If there’s
no named beneficiary, your IRA will pass
to the default beneficiary named on the
IRA custodial agreement (at Vanguard, it’s
your spouse). For more information on
beneficiaries, see page 20.
13Common estate planning strategies
Many factors can influence the design of The advantage of an outright bequest is
a comprehensive estate plan, and your its simplicity. Generally, once the assets
own plan should be customized to achieve transfer, no further administration is
your personal goals and objectives. In required. If the bequest is to your spouse,
this section, you’ll review some common your unused exemption amount can
estate plan designs and learn about their transfer to your surviving spouse, thus
advantages and disadvantages. Keep in limiting estate tax exposure when your
mind that all of these plans can be tailored spouse dies.
to your personal situation.
The disadvantages of an outright bequest
are the inability to control access to the
An outright bequest
assets if a special event occurs (e.g., your
With an outright bequest, your will states spouse remarries or you name a minor as
that a named beneficiary or beneficiaries a beneficiary) and having little possibility of
will receive some or all of your property, protecting the assets from a beneficiary’s
free of a trust. future creditors.
How assets transfer with an outright bequest
Decedent’s Beneficiary
assets (outright)
14A disclaimer plan A disadvantage is that your spouse must
be willing to disclaim with the possibility
With a disclaimer plan, your will or
of giving up control over the assets, while
revocable living trust directs that all of
also meeting specific legal requirements in
your assets are distributed outright to your
order to avoid possible gift taxes.
spouse. Then, if your spouse chooses
to disclaim any portion of those assets,
the disclaimed amount goes to a trust What’s a disclaimer?
for the primary benefit of your spouse. A
A disclaimer legally allows a beneficiary to
disclaimer plan gives your spouse flexibility
say “no thank you” to some or all of the
in determining how much—if anything—
assets he or she is eligible to receive. When
should be held in a trust at the time of your
someone disclaims assets, ownership is
death. If properly structured, the assets
determined by assuming that the person
held in the trust won’t be included in your
disclaiming the assets predeceased the
spouse’s estate upon his or her death, thus
transferor of the assets. To be effective,
avoiding federal estate taxation.
a disclaimer must meet specific legal and
One advantage of a disclaimer plan is timing requirements. Check with your
that your spouse is able to make planning attorney to learn about the best way to
decisions at the time of your passing, disclaim assets.
which offers flexibility if tax laws have
changed. In addition, your spouse can
select the assets he or she wants to keep
or wants to disclaim.
How a disclaimer plan works
Decedent’s Spouse
assets (outright)
Spouse
Children
disclaims an Disclaimer
(in defined
amount up trust for the
proportions;
to applicable benefit of
either outright
exclusion spouse
or in trust)
amount
15Credit shelter trust and marital Finally, the marital share—or the balance
share plan of the assets after funding the credit
With a traditional credit shelter trust shelter trust—can be distributed outright
(CST) and marital share plan, your will to your spouse or held in a trust for his
or revocable living trust directs that your or her benefit. If the assets are held in a
assets up to your exemption amount be trust, your spouse can receive the income
distributed to a credit shelter trust, and generated by these assets and can also
the balance of assets thereafter—called receive principal distributions.
the marital share—be distributed to your A trust for the marital share may be
surviving spouse (outright or through a appropriate if you want to:
trust). Married couples who have estates
that exceed the exemption amount often • Ensure professional management of
include a CST as part of their estate plan. your assets.
• Protect the assets from being collected
By using this estate plan design, you by creditors or used by a future spouse.
can defer any potential federal estate
tax liability until the death of your • Control distribution of assets during your
surviving spouse, and also limit estate spouse’s lifetime.
tax exposure upon his or her death. • Ensure that the individuals you specify—
During your spouse’s lifetime, he or she your children or other heirs—are the
can benefit from the assets in the credit ultimate beneficiaries of your trust.
shelter trust by receiving the income
generated by those assets and, depending A common type of marital trust is the
on the terms of the trust, also receive qualified terminable interest property trust,
principal distributions. known as a QTIP trust. If you elect a QTIP
trust, it can provide income and may allow
When your spouse dies, the assets in for principal distributions for the lifetime of
the credit shelter trust pass to the your spouse. It will also allow you to retain
beneficiaries named in the trust document ultimate control over who receives the
and generally wouldn’t be included in property remaining in the trust after your
your spouse’s estate, thus avoiding spouse’s death. Taxes are deferred until
federal estate taxation. However, careful your spouse dies and the trust property is
consideration should be given to the effect distributed to the final beneficiaries you’ve
of state transfer taxes, depending on named, such as your children.
where you live.
With both the CST and marital share trust,
you could give your spouse the flexibility
to determine who should receive the trust
assets when he or she passes away.
16How a CST and marital share plan can work
Decedent’s
assets
Applicable Marital share
exclusion (balance of
amount assets)
Credit shelter
trust for the Spouse
benefit of (outright or
spouse and/or in trust)
children
Children
(in defined
proportions;
either outright
or in trust)
17Additional estate planning tools
No estate plan is complete without having Privacy waivers (privacy releases) ensure
the following documents prepared. that your health care agents will have
Durable power of attorney (POA) is a access to the information and documents
simple way to arrange for someone else necessary to represent you in health care
(an agent) to handle your financial affairs matters. Many health care powers of
if you‘re no longer willing or able to do attorney include this privacy waiver. Check
so. You should check with your financial with your medical provider because many
institutions for their specific requirements have their own version of a privacy waiver.
for use of an attorney-drafted POA. Many Living will (advanced medical directive)
have their own authorizations for the provides instructions to your physician
accounts at the financial institution. For on the types of life-sustaining treatment
example, Vanguard will accept an attorney- you do or don’t want if you’re unable to
drafted POA, but for our clients’ convenience communicate those decisions yourself.
we offer our Vanguard Agent Authorization.
Special note about young adults
Power of attorney for health care (health Remember that in most states, once
care surrogate designation/health care a child reaches age 18, he or she is
proxy) enables a trusted family member considered an adult. As a result, you may
or friend to make decisions about your not have access to information, such as
medical care if you’re unable to do so. It’s his or her health care details, that you
advisable to discuss the type of care you’d otherwise would have had when your
want with this individual ahead of time. child was a minor. Therefore, you may
want your adult child to meet with an
estate planning attorney to determine
whether he or she should have any of
these additional documents, specifically
the health care power of attorney and
living will.
18Select your fiduciaries
Your estate planning documents create a successor trustee as well. Your
various roles, many of which we’ve already successor trustee could be an individual,
mentioned in this booklet. These roles are such as a family member, or an entity,
typically defined as fiduciaries and include such as Vanguard National Trust
executor, guardian, agent, and trustee. Company. Either can assume control of
An important part of the estate planning the trust after your death or in the event
process involves the careful selection of you become mentally incapacitated.
these individuals or entities that you trust You could have multiple fiduciaries as
can carry out the plan you’ve put together. part of your estate plan. The people you
• Executor (personal representative): select should be individuals you trust
Your executor will be the individual(s) and who know when to ask for legal, tax,
or entity responsible for gathering recordkeeping, or investment advice.
your assets following your death,
managing and maintaining those assets,
completing all the administrative and Should you consider
tax responsibilities of your estate, and a corporate trustee?
distributing your assets according to your In many instances, the use of a corporate
wishes. An executor can be responsible trustee can be extremely valuable. Even
for these tasks anywhere from 6 to if family members or friends are able to
24 months. manage the complexities of a trust, you
may not want to burden them with the
• Guardian: Your guardian will be the
considerable time and tasks involved. A
individual(s) responsible for the physical,
corporate trustee can offer the expertise,
day-to-day care of your minor children
objectivity, integrity, and time necessary
following your death.
for managing trust responsibilities. And
• Agent: Your agent will be the there’s no risk that a corporate trustee
individual(s) responsible for handling will have to step aside because of illness,
your affairs, managing your assets, and death, or personal issues.
making decisions on your behalf in the
event that you’re not able or willing to. If you’re interested in this option,
consider Vanguard National Trust
• Trustee: Your trustee(s) will be
Company. We can handle the many
responsible for investing and managing
tasks associated with administering
the trust assets, distributing the assets in
a trust so your family doesn’t have to.
accordance with the terms of the trust,
Contact us for more information.
keeping accurate records, and filing all
necessary tax returns. You can act as
trustee of your living trust during your
lifetime, but you should appoint
19Designate your beneficiaries
You’ll need to name beneficiaries on any Designating primary and
retirement accounts, life insurance policies, secondary beneficiaries
and annuities you have. You’ll want to Your primary beneficiary is the first in line
coordinate the beneficiary designations for to receive any remaining account assets
these accounts with the rest of your estate after your death. Your secondary, or
plan in order to ensure that all your assets contingent, beneficiary receives the
are distributed in a manner consistent with remaining account assets, but only if there
your wishes. are no surviving primary beneficiaries at the
time of your death.
When you choose beneficiaries, remember
that some of your assets (IRAs and If you designate your spouse as the
other retirement accounts, in particular) primary beneficiary and your children as
transfer to those named beneficiaries (if secondary beneficiaries, your children will
no beneficiaries are named, the assets be entitled to inherit the assets only if
go to the default beneficiary in the IRA your spouse dies before you do, or if your
agreement or retirement plan document). spouse disclaims entitlement to the assets.
As a result, the beneficiaries you name on
your accounts generally supersede any Note that you may designate a trust,
other instructions—even those in your charity, or other entity as your primary
will or trust. So you should review your or secondary beneficiary. If you choose
designations periodically to keep your to designate a trust as a beneficiary for
estate plan up to date. your retirement accounts, be certain
to consult with your attorney to ensure
the designated trust meets all legal
Review your beneficiary designations
requirements to receive such an account.
whenever a major life event occurs—
marriage, divorce, death, or the birth of a You may choose several primary and
child, for instance. secondary beneficiaries to receive varying
percentages of your assets. Keep in mind
that the percentages in each designation
Categorize your
category must total 100%. If you don’t
beneficiary designations
name a beneficiary, the agreement
The responsibility of designating (such as the retirement plan or custodial
beneficiaries includes categorizing agreement) governing the account
them appropriately. You’ll want to: generally has a default beneficiary listed.
• Specify both primary and For example, the default beneficiary listed
secondary beneficiaries. in the Vanguard IRA® Custodial Agreement
is the spouse or, if unmarried, the estate.
• Determine whether you should
specify your beneficiary by name
or by relationship.
20Designating beneficiaries by name Per stirpes is a way to name beneficiaries so
When you identify a beneficiary by name, that the surviving descendants will receive
you leave your assets to a particular named only what their immediate ancestor would
person or persons, regardless of their have received if he or she had been alive at
relationship to you before or after your death. the time of your death.
For example, if you stipulate your spouse For example, if you have two children
by name and later divorce, your former and one of your children predeceases you,
spouse may be entitled to the remaining that child’s children—your grandchildren—
account assets unless you change your will receive the deceased child’s share of
beneficiary designation. Likewise, if you the assets.
designate your children or grandchildren
Not all accounts offer “per stirpes” as
by name, and you make no updates when
an option for beneficiary designations.
a subsequent child or grandchild becomes
part of your family, the new child won’t be
entitled to any portion of your assets.
Transfer on death plan
Designating beneficiaries A transfer on death plan allows you to
by relationship designate beneficiaries on an individual
When you designate your beneficiaries nonretirement account. This type of plan
by relationship, you leave your assets to a supersedes an established will or trust.
person or group of people defined by their Check with your attorney to make sure a
relationship to you. transfer on death plan would not conflict
with the rest of your estate plan.
For example, if you designate your spouse
by relationship and then you remarry
later, your current spouse will be entitled
to your account assets. Similarly, if you
use the relationship designation “to my
descendants who survive me, per stirpes,”
you allow future children, grandchildren,
and future descendants to be included in
an inheritance.
21Required distributions and your beneficiaries
After your death, all your IRAs (including RMD rules are complicated and vary
Roth IRAs) that pass to your beneficiaries depending on many factors, such as
are subject to required minimum distribution whether the owner dies before or after
(RMD) rules under IRS regulations. If you reaching the required beginning date for
need to update your beneficiaries, you can distributions and who the beneficiaries are,
usually change them for most assets at if any. Rules for the beneficiaries can be
any time during your lifetime by completing complex too, and while the table below
and returning a new beneficiary designation highlights the main points, you should
form. A new form supersedes any form you consult with your tax advisor to understand
completed previously. how these rules apply to your situation.
IRA beneficiary implications
Beneficiary Asset transfer details Asset distribution schedule
Your spouse Your spouse can choose to take the account as If your spouse assumes the IRA, his or her
a beneficiary or assume ownership of the IRA at age determines when the RMDs must be
any time after your death by changing the title of withdrawn. If your spouse takes the account as
your IRA to his or her name or by rolling your IRA a beneficiary, he or she may be able to delay
into his or her own IRA. the start of the RMD distributions. Other special
rules may apply to spouses.
Nonspouse Your beneficiary can receive your assets as an RMDs must be taken annually starting December
(your child/children, inherited IRA. If there are multiple beneficiaries, 31 of the year following your death and are
for example) your account is divided among the beneficiaries in generally based on a factor determined by your
the percentages you indicated. beneficiary’s age (for multiple beneficiaries,
separate inherited IRA accounts must be created
by December 31 of the year after your death for
this to apply). Other special rules may apply.
Trust Options for trust beneficiaries depend on whether If the trust meets all relevant conditions, RMDs
the trust is a qualified trust under IRS regulations. must be taken annually starting December 31 of
A qualified trust can be eligible for “look the year following your death and are generally
through” treatment that results in more favorable based on the life expectancy of the oldest trust
distribution requirements than those applied to beneficiary. Other special rules may apply,
a nonqualified trust. Your account assets are especially if your spouse is a beneficiary of
allocated by the trustee per the terms of the trust. the trust.
No named If there’s no named beneficiary, your IRA will All assets will need to be distributed within five
beneficiary, estates, pass to the default beneficiary named in the IRA years of your death or on a schedule determined
and nonqualified custodial agreement. At Vanguard, your spouse will according to your age at the time of your death
trusts be the default beneficiary. If you aren’t married at (this depends on whether you die before or after
the time of your death, the default beneficiary will the required date for distributions). This scenario
be your estate. If the IRA passes to your estate almost always results in a large income tax bite.
or a nonqualified trust, your beneficiaries will be
subject to less favorable distribution requirements
than if you named a beneficiary directly.
Please note: This table is for illustration purposes only. Consult with your tax advisor for additional information.
22Get started on your plan
When you’re ready to create an estate Be sure to review each attorney’s
plan, you’ll want to contact professionals biography and consider first those who
who understand your needs and recognize list estate planning, wills, and trusts as
the importance of keeping your plan their areas of expertise. You should also
accurate and up to date. You’ll need to do choose someone who you think will
some recordkeeping on your own as well. understand your goals and be able to
implement your plan. Finally, make sure
Select an estate planning attorney you’re comfortable with the attorney’s
fee schedule.
The first step is to hire an estate planning
attorney. To find one qualified in your area, Please note: Vanguard doesn’t receive
you may want to: compensation for referring you to the
• Speak to your friends and colleagues websites provided. The companies,
about whom they’ve had positive attorneys, and their law firms aren’t
experiences with. associated directly or indirectly with
The Vanguard Group, Inc., or its
• Contact your state, county, or local
affiliated companies.
bar association.
• Visit the website for the American What to take to your first meeting
College of Trust and Estate Counsel
(www.actec.org), an association of To make the most of the first meeting with
attorneys who specialize in estate your estate planning attorney, bring the
planning. following information with you:
• Notes regarding your goals and
• Go to martindale.com, an online directory
of attorneys that can be narrowed down objectives for the transfer of your wealth.
by location and practice areas. • Names and birth dates of family
members and other beneficiaries.
• Details regarding the concerns you may
have for any of your beneficiaries.
• A list of all of your assets (including
the values and how they’re titled), your
debts, and life insurance policies.
• Copies of any estate planning documents
you already have in place.
23Now that you have a plan
Once you have your estate plan in place, • Communicate often: Begin having
you may think you’re done. But now conversations with your beneficiaries
it’s important to begin preparing your now. Let them know what they’ll need
beneficiaries by helping them understand to do when you die and who will be
what will happen after you pass away, and responsible for specific tasks.
what they should expect when they inherit • Start educating: If your beneficiaries
your assets. have little experience or knowledge with
Here are some strategies to consider: investing and estate planning, it may be
helpful to begin educating them so they’ll
• Get organized: When you die, it’ll be know what to do with the inheritance
important for your loved ones to know they receive.
what your debts are, where you hold
your assets, and who your advisors By starting to prepare your beneficiaries
are. Use a document called Your now, you can help ensure that your family’s
Personal Financial Inventory, available at transition will be more seamless, while also
vanguard.com/financialinventory, so minimizing the emotional impact of your
you can start organizing this information. death on your family.
• Put it in writing: By creating a simple
letter of instruction, you can provide
important information that your heirs
need to know, such as where to find
important documents (like Your Personal
Financial Inventory), directions regarding
your funeral and burial preferences,
details regarding the daily tasks you
handled, and much more.
24Connect with Vanguard® > vanguard.com > 800-567-5163
Advice services are provided by Vanguard Advisers, Inc., a
registered investment advisor.
© 2019 The Vanguard Group, Inc.
All rights reserved.
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