Understanding the Basics of Estate Planning

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 publication and is subject to change • Sizing up your estate. 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.

1 Size 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

2 Evaluate 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 your assets, such as an inheritance? you own with your spouse or with someone else. • Do you have an interest in any trusts?

3 Valuing 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 ($11.7 The federal estate tax may be imposed million per decedent in 2021)* 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 $11.7 amount (DSUEA): The portion of the million per U.S. decedent in 2021*. 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.

5 More 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 2021. He’s survived by his wife, and had • A husband dies in January 2021. used only $2 million of his $11.7 million He’s survived by his wife, and had exemption amount. used only $2 million of his $11.7 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 $21.4 million (this includes amount of $21.4 million (this includes her $11.7 million exemption in addition her $11.7 million exemption in addition to her deceased husband’s $9.7 million to her deceased husband’s $9.7 million DSUEA). DSUEA). • The wife remarries.

• Her second husband dies.

• Because the wife remarried and survived the second husband, her exemption amount remains $11.7 million (it doesn’t include the original husband’s unused $9.7 million DSUEA).

6 Federal 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 2021) 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 2021 ($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.

7 Federal exemption amounts and State transfer taxes that may tax rates for 2021 affect your estate

Estate tax $11.7 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 $11.7 million* depending on where you live. 40% States may impose a tax in the form of GST tax $11.7 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.

8 Why 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 $159,000 in 2021* 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 2021, 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 2021 ($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.

9 What 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.

10 The 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.

11 When 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).

12 How 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.

13 Common 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)

14 A 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

15 Credit shelter trust and marital Finally, the marital share—or the balance share plan of the assets after funding the credit shelter trust—can be distributed outright With a traditional credit shelter trust to your spouse or held in a trust for his (CST) and marital share plan, your will or her benefit. If the assets are held in a or revocable living trust directs that your trust, your spouse can receive the income assets up to your exemption amount be generated by these assets and can also distributed to a credit shelter trust, and receive principal distributions. the balance of assets thereafter—called 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.

16 How 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)

17 Additional 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.

18 Select 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

19 Designate 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 beneficiary designations category must total 100%. If you don’t 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.

20 Designating 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.

21 Required distributions and your beneficiaries

After your death, all your IRAs (including contribution plan accounts are required to Roth IRAs) that pass to your beneficiaries be distributed by the end of the tenth year are subject to distribution rules under the after the IRA owner or plan participant Internal Revenue Code and supporting dies, with exceptions for certain types of Treasury Regulations. The Setting Every beneficiaries (referred to as eligible Community Up for Retirement Enhancement designated beneficiaries”),including a (SECURE) Act of 2019 recently updated surviving spouse or minor child of the these rules, which generally apply to original owner, who are generally still distributions with respect to individuals who permitted to take distributions over the die after December 31, 2019. eligible designated beneficiary’s life Under the SECURE Act, the balances of expectancy. inherited IRAs and inherited defined

IRA beneficiary implications

Beneficiary Asset distribution schedule

“Eligible Designated Surviving spouse, disabled persons, chronically Maintains “stretch” provisions. Beneficiary” ill persons, individuals not more than 10 years younger than the decedent, and minor children of the decedent (until they reach the age of majority).

Non-”Eligible Individuals not considered an “eligible designated Subject to the 10-year distribution rule. Designated beneficiary”; certain trusts. Beneficiary”

Non-Designated Charities, estates, certain types of trusts. Subject to the 5-year distribution rule (if Beneficiary decedent had not started taking RMDs), or payout over the remaining life expectancy of the decedent (if the decedent had started taking RMDs).

Please note: This table is for illustration purposes only. Consult with your tax advisor for additional information. 22 Get 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.

What to take to your first meeting To make the most of the first meeting with your estate planning attorney, bring the following information with you:

• Notes regarding your goals and objectives for the transfer of your wealth.

• 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.

23 Now 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.

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Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

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