A few weeks ago, I sat in on a meeting with some family members and their estate planning attorney. I wanted to make sure I understood how my family’s assets were currently set up to be inherited and what role I was supposed to play when the time came. It may sound like a morbid activity – sitting down to talk about what will happen when someone passes - but in reality, it was a really helpful meeting for everyone involved. Not only that, but I believe it gave my family members a great sense of peace knowing that they had a clear understanding of what their financial legacy would be. If you haven’t taken the time to establish an estate plan, I highly encourage you to do so, not only because it helps ensure that your “stuff” is left to the right individuals, but because doing so can also provide peace of mind. As you do so, here are a few things to think about:
Do you have a will?
At the very least, you should have a will. A will is a basic document that lays out what you would like to happen to your belongings after you’re gone. Estate law varies from state to state, so if you’re looking to just get something down, I would suggest pulling a template from the internet that complies with the state you live in (for example, google "sample will for the state of California"). You’ll also want to do some research on what it takes to firm up your will. In the state of Colorado, where I live, it’s a good idea to get your will notarized as this will give it greater authority in probate court. Once you have a basic will in place, at some point you may also want to sit down with an estate planning attorney and have them review your will and your assets. While meeting with a lawyer can be a costly exercise, having a pair of legal eyes review your plan and make recommendations can be incredibly valuable and well worth the fee.
How will your stuff be inherited?
As you prepare your will, consider each of your assets – your retirement accounts, your brokerage accounts, your bank accounts, your home, your car, your jewelry, etc. Create a checklist so that you make sure you include instructions for each item. Then consider how each of those items will be inherited. Simply noting it in your will may not be the only step to take. For example, IRAs can be inherited directly so long as you note who the beneficiaries should be on the account. Not only that, but the listed beneficiaries on the account take precedence over your will so you’ll want to make sure that you keep your beneficiaries up to date.
Additionally, you’ll want to walk through what actually happens when your assets are inherited. One common mistake people make is listing only one person as their beneficiary and then leaving instruction for that person to distribute the assets to others. Unfortunately, this can end up being a really costly way for the assets to be inherited, leaving each heir off with less because of taxes and fees. For example, let’s say you only name one of your children as the beneficiary on your IRA but then note in your will that they are to split the assets among their siblings. As soon as they distribute the IRA, the full amount that they distributed becomes taxable to them. This can result in a giant tax bill. Instead, it would have been best to name each of your children as a beneficiary to avoid having to distribute the inherited IRA. Instead, the account is simply split into the percentages you specified for each of your children with each new account maintaining a tax-deferred status.
You should also consider how your assets are titled. If you’ve created a trust to help execute your wishes, you need to make sure to title all the relevant assets in the name of the trust. If you include instructions in your trust for what to do with your home but fail to title your home in the name of the trust, then the instructions are moot. You may also note in your will that you want a specific account left to your children, but you can make the process of inheriting that account easier on them by titling that account so that it is inherited directly. You’ll want to work with both your estate planning attorney and financial planner to make sure all of your assets are correctly titled and that they have the appropriate beneficiaries listed. It’s also a good idea to review each of these items every five years or so to make sure they remain up-to-date.
How does probate work?
As you review your assets, you’ll also want to consider the monetary value of each asset. Once the assets in your estate that aren’t set to be inherited directly reach a certain value known as the de minimis value, they become subject to probate. This value varies from state to state but to give you a general idea, the de minimis threshold in my home state of Colorado is currently $65,000. This may seem like a lot, but the value of your estate can add up quickly, and once it reaches that limit, it requires that your heirs go to probate court to prove out your will before anything can be inherited. This can be both costly and time-consuming so it’s worth it to make sure you’ve created a plan for your assets and belongings. There are many options to minimize the time your heirs will spend in probate or avoid it all together including titling your assets to be inherited directly and/or creating a trust. An estate planning attorney can help you decide what your best course of action should be.
While it may not be fun to think about, building a plan to execute your financial legacy has huge implications and is something you shouldn’t put off. You have worked hard to build the life you have and you owe it to both yourself and your loved ones to make sure that your hard work is not wasted on unnecessary fees and taxes when you’re gone. If you’d like to talk with a planner about any questions you might have regarding how your assets will be inherited, please don’t hesitate to shoot us a message. We’re happy to talk through it with you and point you in the right direction should you need further assistance.
*a version of this article first appeared on A Gal's Guide to Money on October 18, 2018.