No matter the size of your “estate,” if you do not have a written plan in place state laws may, by default, determine who inherits your assets and when they receive them. The court may appoint a guardian for your children and an administrator for your estate.
Your estate could wind up paying substantial and unnecessary taxes and administrative costs – further, your wishes may not be met – the ring from your grandmother that you want to leave to your granddaughter, the stamp collection you worked so hard on that you want to leave to your son… your wishes may not be met.
We tend to associate estate planning with significant wealth, and while those who are fortunate enough to fall into that category are generally motivated to perform more formal and complex estate planning – it is not just for the very rich. Every one of us has an estate; as I mentioned last month, no matter your financial situation, you have an estate. .
In brief, an estate is the sum of what you own, all of your assets – bank accounts, property, personal items, etc. It may also refer to something you are responsible for – children, business interests, etc. In brief, estate planning is the process of pre-determining what will happen to your assets, and that for which you are responsible, upon your death or incapacitation.
Planning Considerations
I have experienced first hand all too many cases with families, often of modest means, where a lack of simple estate planning efforts resulted in painful circumstances, both financially and emotionally – not to mention the difficulties in administration. While higher tax rates are often the driving reason behind planning for large estates, they are not the only consideration. Here are a few issues to consider, some which may be important to you and yours:
1. Planning to determine who receives what size share of your assets.
2. Determining how and when your beneficiaries will receive their inheritance or income.
3. Deciding who will manage your estate (executor, trustee, etc.) and be responsible for distribution of your assets.
4. Reducing administrative expenses and delays; clearly, the more you reduce fees, the more of your hard earned money is passed on to your heirs.
5. Selecting a guardian to care for your minor or special needs children.
6. How to provide financial management for funds that may pass later to grandchildren.
7. How to facilitate the orderly continuance or sale of a family business or real estate investment property.
I repeat:
Most people feel strongly about who should inherit their assets and when. However, they are often less sure about what to consider as they select an executor and trustees. Your executor is your personal representative after your death and is responsible for such functions as:
* Administering your estate and distributing assets to your beneficiaries.
* Paying the estate expenses and any outstanding debts.
* Ensuring that all life insurance, employee benefits and retirement plan proceeds are received.
* Filing the necessary tax returns and paying the appropriate federal and state taxes.
In short, your executor administers your will. When these duties are met, the job ends. However, if your will creates trusts to accomplish more long-term goals, you need a trustee. Your trustee is responsible for managing the trust’s assets and ensuring the beneficiaries are provided for in accordance with provisions of the trust. Individuals are often torn between choosing an individual as the executor or trustee and naming a corporate entity, such as a bank. Many people name both as co-executors or co-trustees. Here are some advantages and disadvantages of each:
Corporate Executor and/or Trustee Advantages
* Specialist in handling estates and trusts.
* No emotional bias. Impartial and usually free of conflicts of interest.
* Never moves or goes on vacation.
* Never dies or gets sick.
Corporate Executor and/or Trustee Disadvantages
* Usually has little familiarity with the family.
* Administrative fees may be higher.
* Rarely will continue any family-owned business.
* Rarely maintains real estate requiring management.
Individual Executor and/or Trustee Advantages
* More familiar with the family.
* Administrative fees may be lower.
* May be familiar with family business interests.
Individual Executor and/or Trustee Disadvantages
* Probably not experienced in handling estates and trusts.
* Could have an emotional bias.
* May not be impartial toward all heirs.
* Could have schedule conflicts.
* Could be incapacitated at times.
Consider a Living Trust and/or a Will
A living trust (also known as a self-declaration or revocable trust) is a legal document that resembles a will. It contains instructions for managing your assets should you become disabled and directions for the distribution of your assets upon death.
Living trusts have two major benefits. Assets in a living trust do not go through probate, which is the process of proving and administering a will under the jurisdiction of a court. It can be a time-consuming and potentially expensive process. It also subjects your private financial affairs to public scrutiny; all probate records are public documents.
Additionally, a living trust provides a perfect vehicle for managing your assets in the event of a disability. While you are alive and well, you can act as your own trustee. In the event of disability, incapacitation or death, the successor trustee that you selected takes over.
As mentioned, I have witnessed on too many occasions the results of lack of planning. Beyond the financial costs there are emotional ramifications – both of which can be reduced significantly with a little advanced effort. This may be the last gift you leave to your loved ones – I urge you to take the time to put your affairs in order sooner rather than later – an added benefit is that you will have a greater peace of mind knowing you have planned for the well being of your loved ones in the event of an unexpected ability to continue to provide for them yourself.
Unless you are confident that all is in order, I urge you to seek professional legal advice to alleviate potential problems down the road.
The above material was prepared by Peak Advisor Alliance. Kristi is a local independent financial consultant with 30 years in financial services. She is a registered representative with and securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. She can be reached in Gilroy at (408) 848-0874, or Hollister at (831) 634-1144, or at www.kristiellington.com. Her column runs on the third Tuesday of the month.
