People tend to avoid estate planning like it’s the plague, but no financial plan can be complete without one. Sure, thinking about your own demise doesn’t rate high on the “fun scale,” but not everything in life does.
To delay or get out of estate planning, people tell themselves all sorts of lies, such as “If I make a Will, I’m going to die.” I suppose that’s not really a lie. If you create a Will, you will die. But it’s also true that you will die if you don’t create a Will and do no estate planning. The difference is that in the latter scenario, where you die without an estate plan, your final wishes may not be carried out, you may leave loved ones confused at to how to handle things, and you dramatically increase the chance for in-fighting among family members.
Here are three other lies people frequently tell themselves to delay, or avoid estate planning altogether. In your natural tendency to want to avoid contemplating your own demise, don’t convince yourself that they’re true.
Wrong! Just because you don’t have a lot of money doesn’t mean you don’t need a Will. Even if you have just a modest bank account, or perhaps a family home, don’t you want to make sure that those assets pass to the people you want them to?
Even if you have no savings, and no home, and no assets of any kind, you should still consider having a Will. A typical Will covers more than just financial issues. In fact, your Will can be used to protect that which is even more valuable than money… your family. Your Will, for example, might dictate who should become the guardian for your children if you pass away.
A Will can also be used to describe the manner in which you would like your body to be handled after your death. Do you want to be cremated? Buried? Perhaps you would like to be cryogenically frozen like the great Ted Williams? Whatever your preference, a Will can set the record straight so that your final wishes are carried out and your loved ones aren’t left guessing what you wanted.
People say this all the time, but it’s almost never true. Usually, when people say, “nothing has changed”, they mean something like, “I’m still married to the same person, and we haven’t had any more children.” This narrow thinking discounts the changes that have occurred “around you” as you’ve aged, such as changes to the law, as well as the simple passage of time.
For instance, 20 years ago, in 1999, the Federal estate tax exemption was “just” $650,000. Today, the exemption has increased by more than 1,700% ($11.4 million in 2019), and the exemption is portable (transferable between spouses). Thus, a married couple can effectively pass $22.8 million dollars to heirs without the use of any trust of “fancy” estate planning.
With that in mind, many of the estate plans that were established years ago with the goal of minimizing Federal estate tax are now out of date. They might, for example, include the use of credit shelter trusts, which might unnecessarily preclude a married couple’s heirs from receiving a second step-up in basis on certain assets at the second spouse’s death.
It’s also worth noting that when people are young and don’t have adult children, nieces, nephews, etc., they often name parents, siblings and/or friends as their executor, health care proxy, or in other positions of trust. But here’s the thing… as time passes, and individuals get older the parents, friends and siblings they named as their fiduciaries years ago have also aged! They may no longer be able to fulfill their intended role when needed… if they are even still alive!
Updating an estate plan to name children, or other younger-but-old- “enough” trusted individuals to serve in critical fiduciary roles can be a solid planning move.
There is little question that a Will is an integral part of many estate plans, but it likely doesn’t control the disposition of all of your assets. In fact, for many individuals, their Will ultimately only governs how their personal property, such as jewelry, artwork, clothing, etc. is transferred, but not their house, bank accounts or retirement assets.
How can that be? Quite simply, a Will only controls assets that pass through the probate estate, but many assets avoid the probate process altogether and pass by contract or operation of law.
For instance, many married couples own their home via a joint-with-rights-of-survivorship ownership structure. In such instances, the home is automatically the property of the surviving spouse, regardless of what the first-to-die spouse’s Will might say.
Retirement accounts also don’t pass by way of Will… or at least they shouldn’t. Instead, retirement accounts, such as IRAs, Roth IRAs, 401(k)s, 403(b)s and similar accounts should pass by beneficiary form.
It’s important to understand that your beneficiary forms generally supersede your Will. Thus, even if your Will clearly states that you “hate John and want all your assets to go to Jane,” if your IRA beneficiary form still says “John”, he’s going to get those funds, and not Jane. By keeping your beneficiary forms up to date, you also provide your heirs the greatest opportunity to “stretch” distributions from the to-be-inherited account, minimizing the impact of income taxes on your legacy.