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Have you outlined the three tiers of beneficiaries in your estate plan?

Many people have a difficult time trying to decide what type of legacy they want to leave behind and who played roles significant enough in their lives to warrant a gift from their estate.  Here is a simple guide you can follow to design the three tiers of beneficiaries for your estate.  Please feel free to make any variation to this guide as you choose.  This is intended to channel your thoughts to achieve a plan that satisfies you.  This is your personal estate plan and you are the only one that needs to be happy with it.

  • The first step in this process is to list all of the people who have played a role in your life and the charities you would like to benefit.
  • The next step is to list the fair market value of all of your assets.  Remember, most of your estate will be sold at your death and turned to cash.  Estimate these values net of all mortgages and liabilities.  Don’t forget to add back life insurance, retirement plans, 401k,s etc.
  • Then, estimate the total expenses of administering your estate at your death to be between 3% to 5% of your total net worth.  This will give you a ballpark of your assets and what your legacy will be.

First Tier Beneficiaries

The first tier of beneficiaries are the people that you simply want to say “thank you for being a part of my life and I want to remember you in my Last Will and Testament”.   This tier is comprised of people where you want to either leave a specific asset  (like a car) or a specific dollar amount, like maybe $50,000.  Many times people in this group are perhaps people that have provided services to you during your life.  Maybe a housekeeper or a gardener.  It could be a distant family member like a niece or nephew, or maybe a godson or goddaughter.   Usually, this group of beneficiaries comprises about 10%  of your estate.  So, if your estate is $1 million, then perhaps somewhere around  $100,000  will be the total of all of these “thank yous”.   So, if you have one niece and one nephew, maybe you give $45,000 to each and then give another $10,000 to a housekeeper.  Once again, this is just a suggestion to channel your thoughts.

Second Tier Beneficiaries

The second tier of beneficiaries are more significant in your life and or maybe some charities.  These gifts are usually described in terms of specific dollar amounts, like the first tier beneficiaries but are significantly higher dollar amounts.  This tier could include closer family members like perhaps stepchildren, or maybe grandchildren.  It could also include some charities.  This second tier is usually around 20% to 25% of your total estate, so maybe $200,000 to $250,000 based on a $1million estate.   So, maybe you have 3 grandchildren and leave $50,000 to each, and then maybe you give $50,000 each to two different charities in your Last Will and Testament.

Third Tier Beneficiaries

Now you have about 2/3rds of your estate to provide for the most significant people in your life.  This is generally the children.  Or, it could be a combination of children and grandchildren.  These gifts are usually stated in terms of a percentage of the “residue of the estate”.  (the assets remaining after the first two tiers of beneficiaries)   As the assets fluctuate up or down while you are alive then these gifts fluctuate up or down at your death.  It is a mistake to try to give away an exact dollar amount of your estate based on current values.  These values will be outdated and will change the very next day.  It is also a mistake to give your entire estate as an asset by asset to beneficiary by beneficiary.  So, in other words, you shouldn’t say I give the house to Joe, the cash to Susie, etc. etc.  All of this is out of date as fast as you write it up.  Using percentages are the best way to make sure that you are providing for 100% of your estate.  So, if you have 3 children, this clause in your Last Will and Testament could be as simple as “I give the residue of my estate to my three children in equal shares”.  Or, maybe you have 4 children and you say, “I give 25% of the residue of my estate to each of my children”.

And last, you must consider which shares will bear the burden of the costs of administering the estate or taxes.  Usually, if the Last Will and Testament is silent on the issue, state and federal law provides that the expenses of administering the estate will come out of the “residue of the estate”, or the third tier of beneficiaries.  For a ballpark, plan on the cost of administering the estate to be between 3% and 5% of the total value of the estate.

Matt Dana

The Dana name has become the symbol of a quality Estate Plan in Arizona. It has taken over 34 years to develop and continues to strive for excellence in the Estate Planning community. At its core is Estate Planning lawyer Matt Dana. [Learn more about Matt]

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