Estate planning is a subject that traditionally incites images of stuffy topics that require obtuse attorneys who spend all of their time fascinating over abysmal tax implications. While this assumption about the topic isn't unwarranted, it's a tad incomplete. Estate planning is a subject that will infiltrate everyone's life and how you choose to address it will make a dramatic difference in the lives of those who have to deal with your matters once you have passed away.
Today I'm not all that interested in detailing depth, as much as I'm interested in presenting a few key concepts that will hopefully adjust some thinking and make everyone realize that like it or not, all roads lead to estate planning.
It's Really Not What You Think
Contrary to the TV drama scene with which we're mostly familiar, it's rarely the case that when someone dies the family gathers in an ornate attorney's office to open up the deceased's Last Will and Testament to doll out the proceeds of his or her estate. In fact, traditionally the attorney who probates the Will (if there is one) will communicate with beneficiaries to the estate either by mail or phone–office visits really aren't all that common (I had the privilege of working in an attorney's office for 3 years where a lot of probate work was completed and I never once witnessed a gathering to read a Will; sent plenty of mail out to inform beneficiaries of their status).
The other point that is important to make here is that Wills aren't really the power document our friends in Hollywood make them out to be. The best description I've ever hear from someone is “a Will is merely a list of suggestions for what you'd like to see happen to your stuff.” That's a pretty spot on observation from my experience. As the dreadful re-run we in the insurance and finance world find ourselves uttering more times throughout the year than we'd care to, “no the Will does not supersede beneficiary designations on a legal contract (i.e. life insurance, IRA, 401k, etc.).”
It's Not Just for Rich People
A few years ago, a small business owner in the Central New York area whom I tried unsuccessfully to turn into a client but kept in contact with just the same found himself in a truly dreadful turn of events. His mother passed away and despite her being financially indigent, he discovered the hard way how a lack of estate planning can be hugely bothersome to those you leave behind. Mom owned a small house purchased years and years prior to the real-estate bonanza that classified the last decade, but was a recipient of state and federal transfer payments due largely to the expenses associated with he poor health. When she died, all of her assets where owned solely be her, and she had done zero to plan for this event. Several months (actually close to a year) of sorting through the details he lamented to me “I never knew someone with so little, could involve so much stuff, makes you realize how important this is to address when you actually have stuff.” I'm not above telling people “told you so” and that's more or less what I said at that precise moment.
So What do You Need to Do
Be well aware of the fact that life doesn't just figure itself out when you die. Understand that Wills are not all they are made out to be. If you have at least some assets (a bank account, real estate, a general investment account) having a Will to explain where those should go is extremely helpful.
Life insurance, annuities, and qualified plans have no need to end up in your Will as they are designed to bypass probate and go directly to your beneficiary. This doesn't mean it's all automatic. If you neglect to name a beneficiary this could spell huge trouble for moving the assets or life insurance proceeds to the intended people. I once got my hands on an internal employee documents for a company that was warning its employees about not having named beneficiaries on a qualified plan they had. The company's HR representative wrote up a small Q&A and addressed the absolute need to name a beneficiary. She essentially told the participants in the plan that they did not have to name a beneficiary, but if they didn't the company wouldn't know where to the send the check if they died. This is of course, false. They know exactly where they need to send the check as they are legally required to send it to the deceased's estate if there are no named or surviving beneficiaries. This can create all sorts of problems since the assets that could have bypassed probate are now included in the estate and are subject to creditor claim (anyone the deceased may have owed money) and included in the calculation used by the attorney to determine their fee for probating the estate (the traditional method used by attorney's to to charge a percentage of the estate assets, i.e. the assets that flow through the probate process).
On the subject of financial products that name beneficiaries, careful about naming children as beneficiaries. This is an area that always get pushed to the back of the to-do list. Naming children as a beneficiary is ok, but heed the warning that proceeds paid to children who have not reached legal majority cannot be in direct ownership of the assets. If the money is left directly to them the proceeds will go a state managed trust that requires a court order petitioned by the child's legal guardian to withdraw money. The quickest and easiest way to address this is through a Testamentary Trust (we will be coming back to this issue in a later post so we're a bit light on the details at the moment).
Plan for this. I know its weird and no one like to think about their mortality, but coming to grips with it is a maturation thing and it'll make life for your loved ones incredibly easier than if you run away from it. I've taken a few shots at Wills, but truth is they are certainly better than dying intestate. Making use of trusts is another approach, that can even be a little stronger. The big takeaway however, consult someone who knows this topic. It's way beyond the grasp of average people, and even though information is out there, and we'll do our best to make information available to get you pointed in the right direction, you need someone who has experience working through these topics to guide you. Making a mistake can be extremely costly.
Traditionally this is the topic that is the topic that acts as the focal point of all estate planning considerations, and it will be a topic we'll be visiting a bit from time to time. For now we're going to address the high points that everyone should know. For starters be wary of the agent/broker or financial advisory who recommends a Irrevocable Life Insurance Trust (ILIT) and the purchase of life insurance merely because your assets exceed the Federal Estate Tax Exemption. ILIT planning addresses the issue of paying taxes for a relatively illiquid estate, it does not prevent the payment of taxes. There are other ways to avoid paying estate taxes that have nothing to do with life insurance and these methods should be entertained first.
Next, there aren't a lot of states that impose a state estate tax, but you should familiarize yourself with your state's laws. It's also a good idea to consider the laws of any states you plan to move to once in retirement. Most of the well known retirement hot spots in the south do not have state estate taxes, for a reason.
Make full use of your estate tax exemption. This one is so easy and yet so violated when it comes to estate planning. Everyone gets an exemption, and it's foolish not to use it. Same sex couples are a little more tuned into this since they can't makes use of the spousal transfer heterosexual couples have available to them. It's foolish for one spouse to own all (or almost all) assets and then transfer to his or her surviving spouse upon death wasting his or her exemption. This is often easier said than done, but should be a topic for serious consideration for anyone who faces estate tax liability.
Much More on the Way
This is a massive topic and we're going to be discussing it in a lot more detail as time goes on as I mentioned in a post last week. But hopefully this here can act as a spring board to get people focused on the topic and get them to understand the seriousness behind good estate planning.