Financial responsibility, so goes the saying, requires that we all set up an estate plan – so that our worldly assets are distributed correctly after we die.
Hogwash, I say with tongue in cheek. The only people who need any kind of estate plan are parents of minor children, and then only if they want to say who will raise their kids if both parents die before the kids are of age (instead of letting some judge in a court do it). A simple will, designating a guardian will suffice for this.
Do I have an estate plan? You bet I do! I’m a control freak. I want to say what happens to all my neat stuff and all the assets I worked so hard to accumulate over a lifetime. I want to try to protect young heirs by giving them time to mature before a bunch of money is dumped on them. I want to say who does the distributing and how my heirs get to choose which of them gets Great Grandpa’s hand carved bed or Great Aunt Kittie’s antique furniture. I want to try to keep money in the hands of my heirs instead of giving it away in taxes. I want to try to avoid family disputes and legal battles over my assets.
But does everyone need a full blown estate plan? I say no, and here is why.
If you die without a plan, the state will distribute for you.
Each U.S. state has it’s own plan, used as your default, for distributing your assets. It may not be what you prefer, especially if you don’t get along with parents or siblings, but your stuff will be distributed. Many states will divy up your assets between your spouse, your kids, your parents and your brothers/sisters and nieces and nephews. So if you want your kids to get it all, that may not happen.
You can use a transfer on death clause to leave assets.
Most states allow you to put a transfer on death clause on real assets, such as your house, your car or your boat. Even if you have a full blown estate plan, if you put a transfer on death clause on your house to let your manicurist inherit it, she will.
You can designate beneficiaries to leave assets.
Most financial institutions will provide a way for you to designate multiple levels of beneficiaries.
So, you could leave your $10 million to your three kids equally, you could leave it equally to them but tell the institution to give it to one kids children if the kid dies before you. You can leave it to a charity or an ‘entity’ like a trust or llc as well. These are called ‘primary’ beneficiaries. If one or more of them are dead, then your millions may be left to your ‘secondary’ beneficiaries. These are the people, charities or entities you name just in case all of the primary heirs are dead before you are.
You can leave it to your spouse by default.
In many states, when one spouse dies and is survived by the other, everything goes to the surviving spouse. Most certainly, however, there will be the hassle of going through that court process called probate to get the assets re-titled.
You can add a joint tenant with right of survivorship.
If you jointly own property with someone else titled as joint tenant with right of survivorship, the other person has equal rights to that property, whether you are dead or alive! Spouses frequently have things titled this way, but you might think twice about doing it with anyone else.
I’ve heard stories of aged parents putting an adult child on their bank account so the child could pay bills for the parent. If you do this, you have just given your child a gift (possible tax consequences) and you have made them a partner on your money. His/her creditors could come after the parent’s money. The child could take it all and buy a trip around the world for themselves and the parent would have no legal recourse.
But, what can go wrong without an estate plan?
So, if all of these methods exist to pass your assets, why bother with the time, trouble and expense of developing an estate plan?
Things can go wrong with all of the above. You don’t get do-overs on death (at least not most of us). If you don’t get this asset distribution right before you die, you don’t get another chance. Your heirs will think kindly of you if you think these things through and make it easier and less costly for them to get your stuff!
Here are just a few things that could happen with no plan in place:
- Your estate may owe taxes at 40 plus percent of the amount over the estate tax limit.
- Your heirs may not have enough ready cash to pay the taxes due on the family farm.
- Instead of getting to spread out the distributions from your IRA or other retirement plan, they may have to take it all (and pay income taxes on it) within a few years.
- Assets could be lost in the shuffle and be escheated to the state.
- Your legacy has a good chance of not being distributed the way you want.
- Your heirs may need to go through a lengthy legal process to get your assets – they may not even have enough in time to bury you!
- You may forget to change beneficiaries on your policies and accounts if you don’t review an estate plan regularly.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.