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Estate Planning 101

Lynn Araujo
October 2017
by Lynn Araujo, CFP®

I recently came across upon a beneficiary designation form for an old life insurance policy I had purchased in my twenties. It's a small policy, but I noticed my husband was named as primary beneficiary and our son was named as the only contingent beneficiary. I must have updated the beneficiaries before our daughter was born. One of my Bragg colleagues witnessed my signature as I promptly updated the contingent beneficiary to name both children. She comically and accurately noted, "You know your son would have totally used this to confirm he was the favorite after all!"

Even for a financial planning professional it can be hard to stay on top of all the details in our financial lives. I would guess the task of "make sure my estate plan is in order" isn't at the top of anyone's list. It's not an easy topic to think about—what happens to my assets when I die?—and on top of that it's so difficult to navigate as well. There is so much information out there, it's hard to know where to start.

We hope this article will serve as both a high level overview of the estate planning process and a way to break it down into manageable steps.

The Basic Documents

The four basic documents that you should have in place are power of attorney, a healthcare power of attorney and living will, a HIPPA document authorizing disclosure of your medical information, and your last will and testament.

As Mary Lou Daly wrote in her recent article "Eighteen-Year-Olds are Adults," every adult should have the first three documents listed above. See her article for descriptions.

The fourth document, the last will and testament, is recommended for adults who have begun acquiring assets, gotten married, had children or started a business. Among other instructions, this document names whom you would like to handle your estate when you pass on (your executor), and whom you would trust to become the guardian of your children. It also provides an outline of whom should receive your assets upon your death or directs your assets to a trust (often a separate document) where your wishes are explained in greater detail.

If you don't have a will when you pass away, you are considered to have died "intestate" and the intestacy laws of your state will guide how certain assets will be distributed. In addition, your heirs will incur higher fees due to the court's appointing an estate administrator and higher clerk fees. And if you do not name a guardian, the court would decide who would receive custody of your minor children.

Keep these documents in a safe and accessible place and make sure someone knows where they are stored.

Asset Titling and Beneficiary Designations

Even if you have a will, there are many assets that are not controlled by your will and will be distributed based on how they are titled or how your beneficiaries are named. Here are some examples:

Joint Assets—There are several ways to title joint assets in North Carolina. The most common is "JTWROS" or "joint tenants with rights of survivorship." If an asset such as a bank account is titled this way, it will automatically pass to the survivor on the account. If you are married, this is often convenient for your operating cash and home. "Tenants in Common" allows each owner to own an undivided interest. At your death, your fractional interest passes through probate and then by the direction of your will. And "Tenants by Entirety" may be used with real estate by married couples.

Assets with Beneficiary Designations—While it's cumbersome to check on whom you may have designated several years ago as your IRA or 401(k) beneficiaries, perhaps you can put it on your list for the next time you have an hour or two free. Check online or call the administrators of these plans. Print the record of the primary and contingent beneficiary designations and keep it with your estate documents. If you are still having children or have grandchildren, please let Bragg or another estate planning professional guide you on the "per stirpes" or "per capita" options. Here are the most common assets that pass by beneficiary designation:

  • IRAs and employer retirement plans (401(k)s, 403(b)s, 457s, and pension plans)
  • Life Insurance and other insurance contracts
  • Employer benefit plans such as stock option plans and deferred compensation

Assets Titled as "TOD (transfer on death)" or "POD (payable upon death)"—If you have an individual taxable (non-IRA) account, most banks and investment firms allow you to make this election.

In all of the cases above, your will is not referred to when these assets are distributed. These assets will also avoid the probate process and the fees charged by your county for certain assets that need to be registered at the court house and distributed by direction of your will.

A client recently described his new will and trust which an attorney had prepared for him. He had a great plan; it was well thought out and provided for his family, other special people in his life, and charities that were important to him. But when we looked at how his assets and accounts were titled and who were named as his beneficiaries, we determined the only assets that would actually pass through his will or trust were his furniture and other tangible personal property such as his car, jewelry, and clothing. His thoughtful and proactive attorney had sent him a detailed follow-up letter describing all recommendations for how his accounts and beneficiaries should be changed to reflect the wishes he'd expressed in his documents. But our client hadn't had a chance to get to this and over time had forgotten the importance of making these changes.

At Bragg, we build detailed balance sheets for our clients. We ask questions about how assets are titled, named beneficiaries, and take notes. This is a good way to walk through your assets, simplify your estate administration, reduce the potential costs, and ensure all assets will be distributed as you intend.

More to Consider

Whether you are having wills drafted for the first time or updating your plan, there are a few other important items to consider including privacy, holding assets in trust for beneficiaries, your charitable intentions, asset protection, and tax planning. Each of these topics warrants its own article and is dependent upon each household's background, family dynamic, preferences, types of assets, and history. When you meet with us next at Bragg, we can help you think through which of these considerations might apply and be important to you. We are not attorneys, but we can help you walk through some of the basics to determine what level of planning and counsel you might need. Here is the 20,000-foot view on a few of these:

Privacy—Wills are recorded at the county clerk's office after your death and are public record. If you don't want others to know to whom you left what, consider having an attorney draft a revocable trust for you. Revocable trusts are not public record and can outline all of your instructions. You will still need a will, which will name your executor, guardian if needed, and direct any assets passing through probate to the revocable trust for further instruction. Assets titled in the name of your revocable trust before you pass on avoid probate costs and provide some benefits of management during your lifetime as well.

Trusts for Beneficiaries—If you have young children or even adult children who will be inheriting your assets, trust provisions can be written within the will or more preferably within a revocable trust. An attorney can draft the document allowing your beneficiaries to access funds for certain reasons and certain amounts at various ages, preventing them from making bad decisions and running through the funds in one fell swoop. This can also be useful if your beneficiaries are in the midst of a situation with creditors or a divorce at the time that the inheritance is being paid out. Trusts are also instrumental in providing for your surviving spouse as well as children from prior and current marriages.

Estate Taxes—If you are married and both you and your spouse are U.S. citizens, you can leave an unlimited amount of property to your surviving spouse without paying estate tax. The estate tax can come into play when either a single individual or the surviving spouse dies. In 2017, each U.S. citizen may leave up to $5.49 million to non-spouse U.S. citizens without paying estate tax. This amount includes the value of all your assets, including life insurance proceeds. If you see your assets reaching this point soon (or by the time you pass away), there are ways to plan ahead. Please come talk to us about your options. This is where estate planning gets a little more complicated and thoughtful consideration of all the facts is needed. There are ways to leave a portion of your assets in trust, so that the growth of these assets is not included in your surviving spouse's estate. And, there are ways to gift during your lifetime, some of which require using part of that $5.49 million exemption we referenced earlier. There are also annual exclusion gifts, charitable trusts, GRATs, irrevocable trusts, irrevocable life insurance trusts, family limited partnerships, LLCs, and intra-family loans, just to name a few vehicles that can be useful in carrying out your wishes.

Revisiting Your Plan

Once all is settled, be sure to revisit your plan every three to five years, when you have a life change such as the birth of a child, a death in the family, retirement, marriage, divorce, or inheritance received, or when the estate tax law changes dramatically.

We hope this gives you a basic understanding of what we mean when we talk about estate planning. Additionally, we hope this article provides a general road map to follow. Please schedule a time to talk with us about your plan if this is on your mind or if you think you have left some pieces out of your plan. We are happy to discuss these topics and help you plan your next step or determine if action is needed.

Disclaimer: We are happy to share these ideas with you. Please know we do not practice law and we are not attorneys. We are happy to partner with you and your attorneys to help you accomplish your goals.