Estate Planning: 5 Things You Shouldn’t Forget

Planning your estate can seem boring, far off, and maybe even a bit morose. But the importance of have a sound estate plan cannot be overstated. 

If you are wondering if you need an estate plan, the answer is, “Yes!” The moment you feel you have any assets of any value to protect, you should consider estate planning services.

When crafting your estate plan, keep these important considerations in mind that will help you better secure your assets. Make your succession plan even more effective. 

 

Why You Need an Estate Plan

First, it’s important to understand the dangers of not having an estate plan. Your estate is everything that makes up your net worth, including investments, real estate assets, bank accounts, and other assets. 

The purpose of an estate plan is to dictate what happens to these assets when you pass away, in as much detail as you need. These plans provide instructions on who gets what, and how the designated point person is to carry out your instructions.

 

Dangers of Not Having an Estate Plan

Without any sort of estate plan, your entire estate will go before the probate court. That’s where the court determines how your assets should be distributed. Probate can be costly and time-consuming.  However, in some states, with good pre-planning, the probate process is significantly simplified in terms of time and cost.  

Perhaps you’ve read the accounts of wealthy celebrities who died without a will or any sort of estate plan.  The probate process can be described as “not pretty.”  Not only can the courts take months or even years to settle your estate (your heirs have no choice but to wait), but your estate will also be liable for court fees. Working with advisory services to create your plan minimizes these risks.

In some states (Texas is a great example), the probate process is very efficient and simplified.  With proper planning, your entire interaction with the probate court may amount to a 15-minute hearing, often today on a video-conference call.  In other states, where the probate process is confining and costly, you may determine that for your heirs’ sake, you should avoid probate at all costs.   If you live in such a state, here are some key items you need to address when forming your estate plan.

Avoiding Probate through “Transfer on Death” or “Payable on Death”

AdobeStock_68695988When completing the ownership paperwork for your assets and accounts, you’ll eventually need to decide between Transfer on Death (TOD) or Payable on Death (POD) accounts when you pass away. Here’s what that means.  These are remarkably similar.  POD is the terminology most banks use for bank accounts.  TOD is the terminology for brokerage, mutual fund, and investment accounts.  In both cases, these ownership forms enable you to pass ownership of your assets directly to a beneficiary of your choice when you pass away in a simple process. 

But, the tradeoff for this simplicity becomes evident if something happens to you before you pass away, if changes occur with your beneficiaries, or if–God-forbid–they predecease you.

If Your TOD/POD Beneficiary Predeceases You

If your beneficiary, unfortunately, passes away before you do, and you haven’t named a new or contingent beneficiary, your estate will automatically revert to probate court, defeating the purpose of your estate plan.  For example, assume Mom names her adult Son as her POD beneficiary for her bank accounts.  Son has 2 children.  However, Son dies before Mom, and she forgets to alter her POD designation on her bank accounts.  Her bank accounts will not automatically succeed to Son’s two children (Mom’s grandchildren).  Rather, the bank accounts will need to go through the probate process of Mom’s estate.

No Recourse if You Become Incapacitated

TOD and POD designations offer no protection or consideration in the event you become incapacitated. If, for whatever reason, you are unable to make decisions on your estate, your POD/TOD beneficiaries will still be unable to access or manage your property for you or supervise the management of their future inheritance.

POD/TOD Bad Timing Outcomes

TODs and PODs are direct transfers upon your death. This means that anything that might be a threat to the personal finances of your heirs at the time you die will impact them. If your heirs declare bankruptcy or are in the midst of divorce while settling your estate, their inheritance can become subject to unintended risks.

What’s the Alternative if Avoiding Probate?

According to Phillip Hamman, CFP, CFA, Chairman of the Linscomb & Williams Wealth Management Committee, “To have more control and a more nuanced protocol for your estate, consider creating a revocable trust while undergoing your estate planning services.” Trust accounts can designate a point person in the event that something happens to the account owner. They can go into as much detail as you see fit.  We’ll have more to say on this below.

 

Legal needs

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Whether you plan your estate relying completely upon a Will, or you choose to combine a Will with a Revocable Trust, considering your personal circumstances and needs is critical.  Like any family, every estate is unique. Make sure that you are taking all of your legal needs into consideration when planning your estate.

For example, if you're a business owner, how will setting up your estate impact your business interests? This can become especially complex as you accumulate more business assets or have more complex arrangements.

Nevertheless, the complexity of your financial situation can still be carefully considered with the right estate planning services. If you set up your estate to account for all your legal matters, you’ll give yourself much-needed peace of mind.

Most Commonly Forgotten Components of Estate Planning 

There are many important items that go into your estate plan. While this is not intended to be an all-inclusive checklist, remember to consider these elements of your estate plan to save yourself future headaches.

Forgetting about Taxes

Everyone knows the old joke about death and taxes – the 2 things that cannot be avoided. This applies to your estate plan, as well. While estate taxes only come into play when your assets reach $12.06 million, it's still something to keep in mind as you grow your wealth.  Under current law, the estate tax exemption will automatically reduce by 50% at the end of 2025.

Once your estate reaches this threshold, then it follows a sliding scale. In any case, keep taxes in mind when putting together and managing your estate.  Taxes, by the way, include income taxes.  Even for modest estates, often a significant asset maybe a retirement account that includes money that has not yet been taxed and will be taxable to the beneficiaries receiving that account.

Forgetting Power of Attorney

Power of attorney grants an individual you specify the ability to act on your behalf under certain circumstances. Without it, you won’t have a point person to manage your assets if you become incapacitated. 

Also, a power of attorney designation given to a trusted and independent neutral party can ensure no conflicts of interests or major disagreements occur with your family in the future.

The Location of Your Estate Planning Documents

Though it sounds basic, it’s particularly important that you secure your estate documents. These documents are essentially the rule book for your money when you pass away. They will protect you, your spouse, your financial plan, and your heirs in the future.

If your documents are destroyed in a fire or flood, or otherwise unusable, this can cause a major headache going forward, and you may not be there to help. Consider using a fire-proof home safe or a bank safe deposit box.  It is also important to ensure that trusted family members know where these documents may be found.  In some cases, you may want to share photocopies of your estate documents with family members (although generally, copies are not a legal substitute for the original signed documents).

Forgetting Your Favorite Charities

Of course, your estate exists to protect your family, but it can be easy to forget to designate a portion of your assets to go to your favorite charity in the hustle and bustle of life.  If you have been regularly supporting certain organizations and causes that hold a special place in your heart, it is a good idea to consider creating some sort of legacy for them as part of your plan.

Don’t overlook the potential applicability for the incorporation of a philanthropic element into your estate plan. Sit down with a wealth management professional for more information. If you are leaving any significant sums for charity, there may be significant tax advantages to certain ways you go about making such gifts that would benefit both the charity and your family members.

Forgetting to Find Out What Your Heirs Want

AdobeStock_262308890In our 50+ years of working with families, we often encounter clients who own a cherished family home or a favorite vacation cottage. In these situations, they may want it to become a staple for the next generation. This idea sounds great, in all honesty.

But it is important to know:  do your heirs want this, too?

If you assume that this is what your heirs want and then put it in writing in your estate or trust document, you risk etching something in stone that your heirs don’t really care for. If this occurs, that vacation home you love might get immediately sold, in any market environment. If profitable, your heirs may be liable for taxes, or even worse, lose the home and sell it at a loss.

The real key on special assets like this is to have some conversation with family members ahead of doing your planning to gain a full understanding of their unique perspective and to confirm it aligns with your own thinking.

Wills, Trusts, and Power of Attorney

So, what’s the difference between a “will” and an “estate plan”? A will is a single document and is much more confined in its scope. A will details how you want your assets to be distributed after your death. It can name an executor to carry out your wishes in the future.

An estate plan is broader and incorporates a series of tools (a will is generally one of the tools). Not only can an estate include a will, but it can also include a trust document, financial power of attorney, end-of-life instructions (advance directive), and more. If a will is a single flower, then consider your estate plan to be a bouquet.

When does a trust account come into play?

Remember: an estate only comes into existence when someone passes away. There may be a need for planning in other situations that occur before your death – incapacity being the most prominent.  A revocable trust can be created while you’re still living. That gives you the option to manage assets yourself or designate an individual to act as the trustee of your trust assets if you become unable to do so.  The trust would go on to provide for the disposition of your assets after your later death, with much of the same language typically included in a will.

Wills only specify how assets should be transferred when you pass away, but a trust is a legal arrangement where the trust creator (grantor) gives a trustee the right to hold and manage assets for any specific purpose. 

Trustees are fiduciaries, meaning that they must act in the best interest of the trust beneficiaries (or face legal ramifications). We recommend that the financial advisors you rely upon should be selected from those who are 100% fiduciaries in all the services they offer.  That is the model we employ at Linscomb & Williams. 

 

Assets & Debt

AdobeStock_194931963Debt, unfortunately, cannot be escaped in the event of one’s passing. The personal representative of the estate is tasked with properly stewarding both the assets and debts of an estate. If the estate can cover the costs of the debt, then it is solvent. 

However, if an estate is not solvent and cannot cover the debts, then the assets designated in the will must cover debts, generally in this order (depending on your state):

  1. Administrative expenses (legal fees and the costs of securing estate assets)
  2. Funeral Expenses 
  3. Debts or taxes under preference of federal law
  4. Reasonable and necessary medical bills of the last illness of the deceased,
  5. Debts and taxes with preference under the state law,
  6. Reimbursement of healthcare benefit payments (like Medicaid)
  7. Any other claims

All of these must be dealt with before family members and heirs can receive estate assets.  Executors and Personal representatives are obligated to use the assets of the deceased’s estate to pay even unsecured debts (no collateral), but they can pay secured debts, like a mortgage or an automobile, as they are able to develop liquid funds from the estate’s assets.

As you can imagine, debt paydown can be complex. It becomes more complicated and costly without an estate plan. Estate planning services can make a world of difference in your financial future, and the future of your heirs. 

So, set up your estate plan including a will, and secure the future for generations to come.

 

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MaryJane M. LeCroy, CFP®

MaryJane M. LeCroy, CFP®

As a member of our Atlanta team, MaryJane M. LeCroy is a Managing Director and Senior Wealth Advisor for Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.