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This article reveals why holding financial assets in a variety of different accounts could have a big effect on the wealth-transfer implications of your overall estate plan.

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If you’re like most people, you hold financial assets in a variety of different accounts and that could have a big effect on the wealth-transfer implications of your overall estate plan.

Here’s a quick overview on how assets in various types of accounts generally pass on to your heirs:

Financial Accounts (bank accounts, nonqualified investment accounts, etc.)

What happens: Depending on state law, assets may pass to heirs without going through probate if the account owner had named transfer-on-death (TOD) or payable-on-death (POD) beneficiaries. If an account was jointly owned and titled “joint owners with rights of survivorship,” the assets typically become the property of the surviving account owner(s). If the account were titled “joint tenants in common,” each portion of the account would be distributed by that person’s will.

Financial Contracts (life insurance, annuities, etc.)

What happens: Upon death, assets pass directly to the beneficiaries named in the contract.

Traditional IRAs

What happens: Spousal beneficiaries have three options: treat the traditional IRA as their own by designating themselves as the account owner; treat it as their own by transferring the assets to another traditional IRA or qualified account; or treat themselves as a beneficiary and choose a distribution strategy. (Beneficiaries may receive distributions based on life expectancy or to be paid out by the end of the fifth year following the year of the owner’s death.)

Nonspouse beneficiaries cannot treat the account as their own; they must choose a distribution strategy as explained above.

Roth IRAs

What happens: Beneficiaries must receive distributions, based either on their own life expectancy or by the end of the fifth year following the year of the account owner’s death.

Employer-Spondered Retirement Plans

What happens: Assets pass directly to the surviving spouse (in most cases) or the individuals listed as account beneficiaries. If the plan participant has no spouse and no other named beneficiaries, the retirement plan’s written policy will provide instructions for naming a beneficiary (such as the estate of the deceased or any living children.) A qualified tax professional can help you assess the federal and state estate tax implications of each type of account or contract.

For more complete information, be sure to consult a qualified financial professional.


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