What Assets are Not Considered Part of an Estate?

In many families, more assets pass outside the Last Will than through the Last Will. Think about non-probate assets: life insurance proceeds, investment accounts, jointly titled real estate assets, assuming they were titled as joint tenants with right of survivorship, and the like. These often add up to considerable sums, often more than the probate estate.

This is why a recent article from The Mercury titled “Planning Ahead: Pay attention to your non-probate assets” strongly urges readers to pay close attention to accounts transferred by beneficiary.

Most retirement accounts like IRAs, 401(k)s, 403(b)s and others pass by beneficiary designation and not through the Last Will. Banks and investment accounts designated as Payable on Death (POD) or Transfer on Death (TOD) also do not pass through probate, but to the other person named on the account. Any property owned by a trust does not go through probate, one of the reasons it is placed in the trust.

Why is it important to know whether assets pass through probate or by beneficiary designation? Here’s an example. A man was promised half of this father’s estate. His dad had remarried, and the son didn’t know what estate plans had been made, if any, with the new spouse. When the father passed, the man received a single check for several thousand dollars. He knew his father’s estate was worth considerably more.

What is most likely to have happened is simple. The father probably retitled the house with his new spouse as tenants by the entireties–making it a non-probate asset. He probably retitled bank accounts with his new spouse. And if the father had a new Last Will created, he likely gave 50% to the son and 50% to the new spouse. The father’s car may have been the only asset not jointly owned with his new spouse.

A parent can also accidently disinherit an heir, if all of their non-probate assets are in one child’s name and no provision for the non-probate assets has been made for any other children. An estate planning attorney can work with the parents to find a way to make inheritances equal, if the intention is for all of the children to receive an equal share. One way to accomplish this would be to give the other children a larger share of probated assets.

Any division of inheritance should bear in mind the tax liability of assets. Non-probate does not always mean non-taxed. Depending upon the state of residence for the decedent and the heirs, there may be estate or inheritance tax on the assets.

Placing assets in an irrevocable trust is a commonly used estate planning method to ensure inheritances are received by the intended parties. The trust allows you to give very specific instructions about who gets what. Assets in the trust are outside of the probate estate, since the trust is not owned by the grantor.

Your estate planning attorney will be able to review probate and non-probate assets to determine the best way to achieve your wishes for your distribution of assets.

Reference: The Mercury (April 12, 2022) “Planning Ahead: Pay attention to your non-probate assets”

What Needs to Be Reviewed in Estate Plan?

When it comes to drafting a will and other estate planning documents, note that you probably should revisit them many times before they actually are needed, advises, CNBC’s recent article entitled “Be sure to keep your will or estate plan updated. Here are 3 key reasons why.”

You should give these end-of-life legal papers a review at least every few years, unless there are reasons to do it more often. Things like marriage, divorce, birth or adoption of a child should necessitate a review. Coming into a lot of money (i.e., inheritance, lottery win, etc.) or moving to another state where estate laws differ from the one where your will was drawn up, mean that you should review your plan with an experienced estate planning attorney.

About 46% of U.S. adults have a will, according to a 2021 Gallup poll. If you are among those who have a will or full-blown estate plan, here are some things to review and why.

Even though your will is all about you, there are other people you need to rely on to carry out your wishes. This makes it important to review who you have named to be executor. He or she must liquidate accounts, ensure your assets go to the proper beneficiaries, pay any debts not discharged (i.e., taxes owed), and sell your home. You should also be sure that the guardian you have named to care for your children is still the person you would want in that position.

As part of estate planning, you may create other documents related to end-of-life issues, such as powers of attorney. The person who is given this responsibility for decisions related to your health care is frequently different from whom you would name to handle your financial affairs. You should look at both of those choices.

Even if you have experienced no major life events, those you previously chose to handle certain duties may no longer be your best option.

Remember that some assets pass outside of the will, including retirement accounts like a 401(k) plan, IRAs and life insurance policies. This means the person named as a beneficiary on those accounts will generally receive the money no matter what your will states. Bank accounts can have beneficiaries listed on a pay-on-death form, which your bank can supply.

If a beneficiary is not listed on those non-will items or the named person has already passed away (and there is no contingent beneficiary listed), the assets automatically go into probate.

Reference: CNBC (Jan. 27, 2022) “Be sure to keep your will or estate plan updated. Here are 3 key reasons why”

Can My Ex Get Some of My Estate?

For many people, their will is their final communication to the world.

A will states how their property should be distributed upon their death. CNBC’s recent article entitled “Your ex-spouse could inherit your money. How to avoid this and other estate-planning mistakes” says that depending on how you plan, it may have a few some surprises for those who are close to you.

There are a couple of situations where you could inadvertently leave money to people you no longer intend as heirs, much to the surprise of other heirs.

An ex-spouse could get some of your money when you die, if you do not update your beneficiaries under a retirement plan.

Divorce does not automatically change a beneficiary designation, unless the divorce decree includes a stipulation to change it. IRAs are the same, so it is not uncommon for an IRA owner to die without having changed the beneficiary designation after a divorce. It’s usually just a simple oversight.

However, most state laws provide that once a married couple is divorced, ex-spouses lose all property rights.

However, pensions are governed by federal law, formally known as ERISA or the Employee Retirement Income Security Act of 1974. As a result, state rules do not apply.

Pensions are not the only accounts that people tend to forget to update. Bank account beneficiary designations are often hard to find, and circumstances may change from when you first set them up.

While it may be tempting to disinherit someone to whom you are no longer close, it can be a bad idea. That is because it can invite all kinds of issues, like a will challenge.

There is always the chance you may reconcile, even on your death bed, at which point it will be too late to update your will and estate plan. Therefore, leave something less to them and do not say anything bad.

To ensure your wishes are carried out the way you want, work with an experienced estate planning attorney.

Reference: CNBC (Jan. 9, 2022) “Your ex-spouse could inherit your money. How to avoid this and other estate-planning mistakes”

Can I Avoid Probate?

If you have life insurance, lifetime survivor benefits, a home or other investments, who gets them and when depends on what you have done or should do: have an estate plan. This is how you legally protect your family and friends to be sure that they receive what you want after you die, says the article “How (and why) to avoid probate: A slap at your family!” from Federal News Network.

A common goal is to simplify your estate plan to make administering it as easy as possible for your loved ones. This usually involves structuring an estate plan to avoid probate, which can be time-consuming and, depending on where you live, add a considerable cost to settle your estate.

There are a number of ways to accomplish this through an estate plan, including jointly owned property, beneficiary designations and the use of trusts.

Many individuals hold property in joint names, also known as “tenant by the entirety” with a spouse. When one spouse dies, the other becomes the owner without probate. It should be noted that this supersedes the terms of a will or a trust.

Another type of joint ownership is “tenancy in common,” However, property held as tenants in common does not avoid probate. The distribution of property titled this way is governed by the will. If there is no will, the state’s estate laws will govern who receives the property on death of one of the owners.

Beware: property owned jointly is subject to any litigation or creditor issues of a joint owner. It can be risky.

Beneficiary designations are a seamless way to transfer property. This can take the form of a POD (payable on death) or TOD (transfer on death) account. Pensions, insurance policies and certain types of retirement accounts provide owners with the opportunity to name a beneficiary. Upon the death of the owner, the assets pass directly to the beneficiary. The asset is not subject to probate and the designations supersede the terms of a will or trust.

Review beneficiary designations every time you review your estate plan. If you opened a 401(k) account at your first job and have not reviewed the beneficiary designation in many years, you may be unwittingly giving someone you have not seen for years a nice surprise upon your passing.

If you own assets other than joint property or assets without beneficiary designation, an estate planning attorney can structure your estate plan to include trusts. A trust is a legal entity owning any property transferred into it. A trust can avoid probate and provide a great deal of control by the grantor as to what they want to happen to the property.

Reference: Federal News Network (March 30, 2022) “How (and why) to avoid probate: A slap at your family!”

How Do I Avoid Probate?

Probate can tie up the estate for months and be an added expense. Some states have a streamlined process for less valuable estates, but probate still has delays, extra expense and work for the estate administrator. A probated estate is also a public record anyone can review.

Forbes’ recent article entitled “7 Ways To Avoid Probate Without A Living Trust” says that avoiding probate often is a big estate planning goal. You can structure the estate so that all or most of it passes to your loved ones without this process.

A living trust is the most well-known way to avoid probate. However, retirement accounts, such as IRAs and 401(k)s, avoid probate. The beneficiary designation on file with the account administrator or trustee determines who inherits them. Likewise, life insurance benefits and annuities are distributed to the beneficiaries named in the contract.

Joint accounts and joint title are ways to avoid probate. Married couples can own real estate or financial accounts through joint tenancy with right of survivorship. The surviving spouse automatically takes full title after the other spouse passes away. Non-spouses also can establish joint title, like when a senior creates a joint account with an adult child at a financial institution. The child will automatically inherit the account when the parent passes away without probate. If the parent cannot manage his or her affairs at some point, the child can manage the finances without the need for a power of attorney.

Note that all joint owners have equal rights to the property. A joint owner can take withdrawals without the consent of the other. Once joint title is established you cannot sell, give or dispose of the property without the consent of the other joint owner.

A transfer on death provision (TOD) is another vehicle to avoid probate. You might come across the traditional term Totten trust, which is another name for a TOD or POD account (but there is no trust involved). After the original owner passes away, the TOD account is transferred to the beneficiary or changed to his or her name, once the financial institution gets the death certificate.

You can name multiple beneficiaries and specify the percentage of the account each will inherit. However, beneficiaries under a TOD have no rights in or access to the account while the owner is alive.

Reference: Forbes (March 28, 2022) “7 Ways To Avoid Probate Without A Living Trust”

What are Biggest Estate Planning Mistakes?

The Huffington Post’s recent article entitled “The Biggest Mistakes People Make In Their Wills, According To Estate Lawyers” explains that your last will and testament is one of the most important legal documents you’ll ever have. A will lets you state where you want your property, minor children and debts to go after you die. It also allows you to appoint an executor to carry out your wishes. The lack of a will is a common tragic mistake. Just about everyone over the age of 18 needs some estate planning. The following are some of the major estate planning mistakes:

  1. Assigning co-executors. You should name only one executor, with alternate executors. Many testators want to make all their children responsible for administering the estate. However, that’s a really bad idea. If you have two executors, and they don’t agree, who gets the final say? However, if you’re set on naming more than one, make it an odd number so it’s majority-rule.
  2. Thinking a will is all you need to avoid probate. Probate is the legal process of administering a person’s estate whether they die with a will or without one (i.e., “intestate”). Although a valid will can say where assets are allocated, it will likely not avoid the probate process if there are assets titled solely in your name. If you have a will in place, but a bank account doesn’t have a beneficiary designation, the assets likely have to go through the probate process before being distributed according to the terms of your will.
  3. Being too vague about items with sentimental value. When people pass away, relationships change. Money can change people. Children who got along so well when you were alive may not get along as well when you’re gone and not there to mediate between them. If you’re too general, a term may be based on interpretation. If people interpret it differently, there’s a problem. If you know that someone wants a specific item, write it down.
  4. Failing to update your will to reflect life changes. The biggest mistake people make when it comes to doing wills or estate plans is their failure to update those documents. There are a number of life events that require the documents to be updated, such as marriage, divorce and births of children. It is recommended that your estate plan be revisited every few years.
  5. Failing to hire an experienced estate planning attorney. It’s important to get your estate planning documents correct. This is because when the documents are executed, the difference between a good set of documents and those drafted by a non-attorney (or one who doesn’t practice in this area of law) can mean considerably more time, money and stress.

Reference: Huffington Post (March 8, 2022) “The Biggest Mistakes People Make in Their Wills, According to Estate Lawyers”

How Do I Talk to My Parents About Estate Planning?

Failing to draft an estate plan can mean a pair of obstacles after a parent’s death. First, it can leave you scrambling to unravel their financial picture while trying to grieve. Second, it can be expensive.

MarketWatch’s recent article entitled “It’s easy to put it off, but here’s why you should talk to your parents about estate planning, and how to start the conversation” says that a wise way to avoid both scenarios is to begin talking with your parents about estate planning. While this can sound like a job just for the uber-rich, it is really an essential process that ensures clear directives exist for all sorts of situations that accompany the end of life.

An estate plan is a chance to set mindful intentions about life’s inevitabilities.  It is, therefore, a great idea to ask your parents to take account of their assets and belongings. This is not just about the numbers and paperwork—it is a chance to gauge preparedness.

Start by asking your parent(s) the following:

  • Who do you want as your primary caregiver?
  • How will we pay for health care expenses?
  • What are your medical care preferences?
  • Which of us should make medical decisions on your behalf?
  • How should we handle your property when you die?
  • Do you have any valuable items that you want to be handled in a special way?
  • Where are your most important documents and do we have access to all of your digital records?

Inheritance often require probate. However, if the right legal documents are in place, it can be a relatively quick and painless process. When someone dies intestate (without a will), it can sticky and get tricky. Understand that the state has its own rules for dying without a will. Depending on the situation, you might need to hire a probate attorney because there will be legal proceedings. Therefore, make certain that your parents have a will and that beneficiaries are clearly stated in all policies and documents. It is a preventative measure that can pay dividends.

Remember that when wealth is transferred (or assets are passed from one person to another), taxes are often inevitable. Work with an experienced estate planning attorney to minimize liability.

Reference: MarketWatch (Dec. 29, 2021) “It’s easy to put it off, but here’s why you should talk to your parents about estate planning, and how to start the conversation”

Can You Keep Your Children from Inheriting Your Money?

What if you want to exclude your children and give your assets to a charity or a college after you pass away? You also don’t want your children to be able to contest your will.

Nj.com’s article entitled “My kids are brats. I don’t want them to inherit. What’s next?” explains that a person with this intention has a number of options for their estate.

First, you should understand that, unless there is a pre-existing contractual agreement or other obligation to do so, a person typically isn’t required to leave anyone other than their spouse anything in their estate.

A properly drafted will by an experienced estate planning attorney allows a person to name the beneficiaries of their estate. This can include charities. It also includes the amount or specific items and in what way each beneficiary will inherit.

You really can’t do much to prevent a child from challenging a will. However, your estate planning attorney can take steps to mitigate the risk that a challenge may be successful. This can include ensuring the testator — the person who establishes a will — has the requisite capacity to sign a will (“being of sound mind”) and that they’re signing it free of any undue influence or duress.

An experienced estate planning attorney will usually meet with a client several times to discuss the client’s assets and intention of disinheriting a child. The attorney will take notes that may be offered as evidence in the event of a will contest and even conduct the meeting in the presence of another attorney or staff member of the firm who could act as another witness.

A will should include specific language that it is the testator’s intent to disinherit a person, and that this individual should be treated as predeceasing the testator for purposes of the will. This helps ensure that the disinherited individual doesn’t somehow benefit.

Note that not all assets pass through the estate and pursuant to the terms of a will. Assets like retirement accounts, life insurance, annuities, and other financial accounts pass by beneficiary designation.

Real estate usually passes by operation of law, such by joint tenancy with right of survivorship.

Reference: nj.com (Dec. 22, 2021) “My kids are brats. I don’t want them to inherit. What’s next?”

What’s the First Step in Estate Planning?

 

Forbes’ recent article entitled “A Love Letter to Your Heirs” explains that not having an estate plan is risky, almost like riding in a speeding car on the freeway without wearing a seatbelt. However, it’s never too late — or too early — to put one together.

The first step is to create a vision of your future. Consider the most important people in your life or your charitable goals. This should help with the distribution of your assets. Then, plan who gets what, both when and how.

Remember that you can modify your estate plan over time. You should also develop and implement a financial plan to provide ongoing guidance for your long-term wealth accumulation goals. This means reviewing your will regularly, especially if your investment portfolio becomes more complex and when your family situation changes, such as the birth of a child or even a divorce.

Work with an experienced estate planning attorney to implement tax mitigation strategies to reduce or eliminate taxes. Keep in mind that different types of assets can and should get different treatment. For instance, you should handle assets you own outright with care. Consider assigning ownership for each treasured heirloom, even as that can seem tedious. Another option is to allow heirs to place bids on items, using money allocated to them from the estate.

Based on the asset and how liquid it is, the executor could either sell it to raise cash or retain it and then distribute it to heirs under the terms of the will. Other assets, such as those held jointly, will go directly to the surviving joint tenant, while qualified retirement plan assets — like IRAs, 401(k)s, 403(b)s, profit-sharing plans, and pension plans will go directly to a named beneficiary. Similarly, life insurance proceeds pass directly to a named beneficiary.

In addition any assets subject to a lien can be sold to pay off outstanding debt, or your executor can use cash from the estate to pay off the debt and retain the asset.

Bequeathing your estate to your chosen beneficiary or contingent beneficiary can be one of the most important life decisions you can make for their future.

Even singles without children should have a will, so that you can pass your wealth to a relative or someone else about whom you care deeply.

Reference: Forbes (Jan. 10, 2022) “A Love Letter to Your Heirs”

What are Biggest Blunders in Wealth Transfer?

When it comes time to transfer what we’ve work so hard to accumulate, the way in which we transfer our wealth can have a big impact on how much of our wealth is actually received by our heirs and how much is transferred to the federal government.

Forbes’ recent article entitled “Top 7 Tax Mistakes Made in Planning a Wealth Transfer” says that tax mistakes can mean losing a lot of hard earned money, if you’re not careful. Here are some of the biggest mistakes made in wealth transfer planning.

  1. IRD Taxes. Most people are unaware of this tax. It stands for “Income in Respect of the Decedent.” It’s the income tax your heirs will pay on tax-deferred assets, such as traditional IRAs, 401k’s and annuities. In many cases, these taxes will push heirs into a higher marginal tax bracket. You should plan to reduce or eliminate the IRD Tax, if you have a 401k, IRA or annuities. For example, if you gift IRA and 401k assets to charity and non-IRD assets to your heirs, you can save them in IRD Taxes! The use of a Charitable Remainder Trust can provide a tax-efficient way to create a “charitable stretch IRA” for your children or grandchildren.
  2. Charitable Giving Mistakes. Most people do charitable giving with after tax cash from their income. However, this isn’t the most efficient way to give. Gifting highly appreciated securities, real estate, or even business interests can give you a double tax benefit: it can eliminate capital gains taxes and still get the charitable tax deduction.
  3. Dying without a Comprehensive Estate Plan. About three-quarters of Americans die without a will. A will, by itself, subjects your assets (and your heirs) to probate. A well-designed estate plan can help reduce or eliminate both probate and estate taxes. Ask an experienced estate planning attorney about creating a comprehensive estate plan for you or review the one you have.
  4. No (or Improper) Beneficiary Designations. This can result in a loss of inheritance for your family. With retirement accounts like IRAs or 401(k)s, properly designating beneficiaries is essential to avoid the loss of further income tax deferral at death. If you don’t have primary and contingent beneficiaries named on all your accounts, these assets will have to go through probate and could cost unnecessary IRD taxes.
  5. Improper Titling of Business Interests. A business is frequently titled only in the name of the business owning spouse. However, when that spouse dies, the business itself must go through the costly process of probate, which can create issues for the operation of the company.
  6. Bad Choices for Ownership & Beneficiary Designations on Life Insurance. Life insurance can be a great financial planning tool and provide liquidity. It can also be a great wealth transfer tool in estate planning or business planning. However, if the ownership and beneficiaries are done incorrectly, the life insurance benefits can be subject to estate taxes. Ask an experienced estate planning attorney about an irrevocable life insurance trust (ILIT).
  7. Giving the Wrong Assets to your Heirs. A common mistake that people make in wealth transfer planning, is to leave a percentage of their estate to their children, another to their grandchildren and another to their favorite charities (or Donor Advised Fund) in their will or via a trust. However, this isn’t the smartest way to distribute your assets from a tax perspective. Doing so could subject them to IRD taxes. Instead, use IRA (and other IRD assets such as 401k) for your gifts to charity and, give non-IRD assets (such as cash, real estate, life insurance, or a Roth IRA) to your children and grandchildren.

Reference: Forbes (Dec. 15, 2021) “Top 7 Tax Mistakes Made in Planning a Wealth Transfer”