A death in the family is life changing and stressful as it is, and the last thing surviving family needs is further discord and confusion on how to administer an estate. Those who do not take any action with their estate during life often make it much more difficult (and expensive) for their heirs manage. Regardless of age, everyone should take simple, necessary action to assure a seamless, rapid, and inexpensive (if not free) transition of assets to their heirs.
Here are some questions to consider when establishing an estate plan:
1. Do I have a will, and if I do, is it up to date?
Wills can address important information such as:
- Who will be the guardian of any minor children left without a parent?
- Who will inherit personal assets (cars, jewelry, furniture, collectibles, etc.)?
- Which trustworthy individual will be named executor of the will (the one who presides over the gathering and administration of assets and assures decedent’s wishes are fulfilled)
As wills vary widely depending on the individual, it’s important to establish one that accounts for all your unique wishes. You can contact an estate attorney to establish and keep your will up to date.
2. Have I taken appropriate steps to arrange my financial accounts to avoid probate?
Probate is the lengthy, often expensive process of having your state assess the estate and determine how it should be administered. Probate can be avoided for most financial accounts by:
- Establishing primary and contingent beneficiaries for retirement accounts
- Payable on Death POD and Transfer on Death TOD provisions on bank accounts and non-retirement investment accounts
- Joint ownership- Is it jointly owned With Rights of Survivorship WROS, Tenancy in Common TIC, or Tenancy by Entirety TBE?
- Some states allow a TOD status for Real Estate
If done properly, after the death of an account owner, the assets therein will seamlessly transfer from the owner to the named beneficiaries without going through any probate process.
3. How do I want to pay for final expenses (Medical costs, funeral costs, legal fees, etc.)?
It wouldn’t be good to leave the burden of expenses that come with a death on all the surviving family. You can establish in your will where you want the money to come from to pay for final medical costs, funeral expenses, legal fees, debt that need to be paid, and anything else you wish. This way, the family does not need to worry about how and who will pay for these things.
4. Are there gifts that I should make during life to reduce my estate tax?
The current estate tax exemption amount is $13.6M per person (though this number will likely decrease significantly in the next few years). This means that any amount above that will be taxed before the estate is administered to heirs. This can be avoided in part by making tax-free gifts during life of up to $18k per person (2024). For example, if you gift $18,000 to 10 different people, you just reduced your estate by $180,000. This would be tax savings of about $72,000! (if your estate is significantly larger than the exemption amount). There are other ways to reduce your estate during life like donating assets to charity or placing assets in an irrevocable trust. These kinds of strategies reduce the size of your estate, reducing how much is paid in estate tax.
5. Is a large portion of my net worth in illiquid assets?
Sometimes an estate consists mostly of illiquid assets like real estate, land, vehicles, or business interest. Surviving family could be left in a difficult situation if there are no liquid assets left to pay for final expenses like medical expenses, funeral costs, or estate taxes. They would need to figure out what to sell and for how much, in order to afford those costs that come with a death. Planning for and explaining in a will which assets to sell, to whom, for how much, and so on could make the process much easier for surviving family members to liquidate assets to pay for expenses.
Estate planning is not just for the aged, wealthy businessman. For the same reason that a young healthy person should have life insurance, they should also have an estate plan, big or small. From simply updating an IRA’s beneficiary, to consulting with an estate attorney about complex strategies, any arrangements made will make life much easier for surviving family going through a difficult time.
By Jimmy Hancock
References
“Estate Taxes: Who Pays, How Much and When: U.S. Bank.” Estate Taxes: Who Pays, How Much and When | U.S. Bank, 15 May 2024, www.usbank.com/wealth-management/financial-perspectives/trust-and-estate-planning/estate-taxes.