Some aspects of life are just so terrifying to think about that we purposefully choose to do the opposite, shove it deep in the back of our brains and forget that it was ever a thought in the first place. I have found myself guilty of this behavior more than once, and I am sure if you look back far enough into your own neurological archives, you have too. The problem with this method is, eventually, we must address the inevitability of the issue we are avoiding.
Benjamin Franklin once said, “But in this world nothing can be said to be certain, except death and taxes.” I know what you are thinking, “Wow, how cliché.” Is this statement overused? Probably. But that does not mean we cannot or should not ascertain some small nugget of wisdom. If we know with 100% certainty that something significant in our lives is going to happen but we are not privy to when, then why would we not plan for it? It does not matter if you have one hundred thousand dollars or one hundred million dollars, everyone needs an estate plan. Once you are aware of the potential problems a lack of estate planning can cause, you may re-think procrastinating this issue.
Unfortunately, when we die our money does not magically appear in the checking accounts of our loved ones or charity of choice. We must tell our money where we want it to go in the event of our deaths. If not, someone else will. That someone is the probate court. The primary function of the probate court is to administer a person’s estate after their passing.
If you die without a last will and testament, the court will adhere to the intestate laws set forth by your state as guidelines for distributing your assets. There is no standard timeframe for the probate process. Each state and situation is different. Smaller estates may take up to one year, while an individual with substantial business interests and intangible personal property could see the process last for several years. Having an up-to-date last will and testament can certainly smooth out this process and will serve as a set of instructions for the court to follow.
It is also paramount to name an appropriate and capable executor within the will. This individual will be responsible for obtaining necessary documentation, hiring a probate attorney, managing assets, and initiating the probate process. If you do not name an executor, or the executor you named is not living at the time of your death, the probate judge will appoint an individual to manage these responsibilities.
Keep in mind, while having an up-to-date will is a great starting point for your estate planning, it does not keep your assets from entering the probate process, in fact it guarantees it. This may or may not be desired or appropriate for your situation. Seeking guidance from financial planning professionals and estate planning attorneys can help you determine what is right for you.
Another aspect to consider is your comfort with someone other than yourself dictating what happens to your hard-earned wealth when you are gone. Most individuals would like the opportunity to choose who, and sometimes more importantly, who does not, inherit their estate. You can stipulate these desires in your estate plan.
Having an up-to-date will in place can also provide you the ability to establish parental guardians for young children in the event of your early passing. This is an invaluable safeguard that every parent with minor children should consider.
Everyone has heard the stories of families being torn apart after a wealthy relative departs and a large sum of money is up for grabs. An exceptionally sad narrative most often caused by the deceased’s lack of planning. You have the capability to stop the arguing before it begins by establishing the fundamental parameters that can provide a clean transition of capital while your heirs are grieving their loss.
No need to panic, there is still time to make the necessary adjustments that will save your family from having to sort out this potentially unpleasant situation by themselves. One of the most simple and effective ways to mitigate the amount of assets that are subject to probate upon your death is to name primary and contingent beneficiaries on all your accounts. This includes any and all retirement accounts, brokerage accounts, bank accounts, health savings accounts, life insurance, and annuity products.
Having beneficiaries named on your retirement accounts will allow these assets to bypass the probate process and be received directly by your intended heir. If no beneficiary is named, as stated above, the probate court will distribute your assets based on the specifications of your will (or intestate law, if no will is in place).
For non-retirement accounts, utilize transfer on death (TOD) or payable on death (POD) designations. Akin to a beneficiary on a retirement account, these designations will also allow your assets to supersede probate. Most individuals hold a majority of their wealth within the above listed categories, which makes this an obvious first step in planning your estate. There is no cost associated with this process other than the time it takes to fill out the form and send it back.
Before you ink that beneficiary-update form and send it back, think carefully about who you are naming as heirs to your wealth. For instance, if you name a minor as someone who stands to inherit a significant portion of your life insurance death benefit, you may want to re-consider your approach. In this scenario, the court would appoint a guardian to the minor, and the funds would be received when the child reaches age of majority (18 or 21 depending on your state).
The issue here is that you may or may not approve of who the court directs as guardian, an ex-spouse, for example. Additionally, the minor is “legally” of age to receive the money, but most likely will not have the financial savvy or discipline to use the funds in a manor that you desire.
A more efficient alternative would be to establish a testamentary trust through your last will and testament, this type of trust is not created until your will passes through probate. The will would stipulate the trust be funded with the life insurance proceeds, appoint a trustee, and the minor be named beneficiary. All of this can be tailored to your discretion, directing how and when the inheritance is distributed.
The way your assets are titled also plays a roll in your foundational estate planning. The most notable example is your home, or any real estate for that matter. Subjecting your home to probate can be avoided.
For most married couples, retitling the home as Joint Tenants with Rights of Survivorship (JTWROS) is a suitable option. This form of asset titling can be used by any two or more individuals and is recognized in all fifty states. When one spouse passes away the survivorship rights kick in and ownership is passed on to the remaining partner.
If you are single or do not have a trust to utilize (also an appropriate option), you may consider employing a TOD deed which would affectively transfer the ownership of your home upon death to your desired heir.
Retitling your home will not be a completely free endeavor, it is best to hire a professional to help you through the paperwork and ensure you are accomplishing what is intended. This will be a small price to pay relative to the consequences of drafting these documents incorrectly.
We hope this blog serves as a starting point for your estate planning, but by no means does it encompass everything there is to know on the topic. Different strategies utilizing trusts, business structures, and charitable giving are beyond the scope of this post but certainly could play a role in your plan.
A well-prepared strategy will involve time and effort as well as assistance from your CPA, CFP, and Estate Planning Attorney. There is no cookie cutter, or one size fits all plan either. This is why it will be critical to involve these specialists who understand your circumstances and can construct an appropriate plan that will allow you to rest easy at night, knowing your family will be provided for long after you are gone.
As always, if you have any questions on the topics covered in this blog please feel free to reach out to us. We are more than happy to show you how these principles can be applied to your unique situation.