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Power of Financial Planning - Part V: Estate Planning

| May 11, 2018
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The action item that my clients always seem to get to last is estate planning. From my experience, most people do not enjoy thinking about their own mortality, and thus this very important subject matter is put off. However, as I will discuss further below, there are tremendous costs that can occur by perishing without an estate plan in place, leaving your loved ones to face them alone.

In this article, Part V, we will explain how a CFP® can help you structure your estate planning according to your wishes, avoiding the negative implications of dying intestate. If you missed Part I, we explained the differences between having a CFP® involved in your financial planning vs. the various other types of advisors, as well as the ethical ramifications of which type of advisor you choose. In Part II, we discussed how a CFP® can help you prepare for retirement (and if applicable your children’s college) by making the right choices now. In Part III, we discussed the importance of protecting your family from an adverse health event. In Part IV, we discussed how a qualified CFP® can help you build a diversified investment plan you can be comfortable with.

Why a CFP®?

I sometimes get the question as to what value a CFP® can bring to the table instead of simply going straight to the attorney. I have found in my career that while attorneys are terrific at drafting documents, they do not see their clients’ entire picture. Thus, they may not be asking all the questions that financial planners ask when considering a client’s estate planning. I believe this is due primarily because we have had the opportunity to see a variety of documents and sit in meetings with several different estate planning attorneys. This has allowed us the ability to see firsthand how different estate planning attorneys work in drafting their clients’ documents, thus allowing us to handpick different estate planning questions and ideas to discuss with our clients.

Furthermore, the fact that we meet with our clients on a yearly basis is how we can be differentiated with an estate planning attorney. Most attorneys will meet with their clients every 7-10 years, whereas we meet with our clients on a yearly basis. Thus, we are naturally going to be in the “know” of our client’s situation and how it affects their estate plan. For instance, we may discuss our client’s children, and the fact that they have become older and more responsible from a financial perspective. This may change when your children should have access to your assets after you have passed without the oversight of a trustee. We will also know when you purchase another asset; we can provide guidance on titling decisions (which as I will explain are critical).

Who is going to take care of my kids?

Why do I have to spend $4,000 to get my estate planning done when my spouse will receive all of my assets? This is a common misconception that I run across. First off, your qualified plans/life insurance bypass your estate planning (for the most part) and pass by beneficiary designation. If you have not had anyone review your designations, you may have outdated beneficiaries. For instance, you may have named your sibling (or worse, an old boyfriend/girlfriend!) when you set up an IRA initially prior to getting married, when you were a spry lad in your 20s. Now fast forward 30 years later, this small IRA may be a large nest egg, and if you pass away, your spouse will be scratching his/her head wondering what the heck happened to this asset (luckily, this cannot happen with your 401k – the government has prevented that).

For all other assets, they are going to pass by way of intestacy, which are the rules governing the allocation of assets to your family after you have passed. This will include any brokerage/cash accounts, your real estate, and any other investment held outside a qualified plan. Unfortunately, the laws of intestacy vary greatly from state to state, thus you must have a strong understanding of your own state’s very complicated system. There can be further complications if you have property in different states (most importantly real estate).

For instance, in Illinois, if you have children but no spouse, your children will inherit all assets, and vice versa. If you have a spouse and children, your spouse will get half of your assets, while your children will obtain the other half. Thus, your spouse may be put in a precarious position of not having enough assets to last a lifetime (especially if such spouse does not have many assets in his/her own name), while your children may have an abundance of wealth that your spouse may not have direct access to.

What Happens To My Assets With No Estate Planning, Part I – Asset Division

Why do I have to spend $4,000 to get my estate planning done when my spouse will receive all of my assets? This is a common misconception that I run across. First off, your qualified plans/life insurance bypass your estate planning (for the most part) and pass by beneficiary designation. If you have not had anyone review your designations, you may have outdated beneficiaries. For instance, you may have named your sibling (or worse, an old boyfriend/girlfriend!) when you set up an IRA initially prior to getting married, when you were a spry lad in your 20s. Now fast forward 30 years later, this small IRA may be a large nest egg, and if you pass away, your spouse will be scratching his/her head wondering what the heck happened to this asset (luckily, this cannot happen with your 401k – the government has prevented that).

For all other assets, they are going to pass by way of intestacy, which are the rules governing the allocation of assets to your family after you have passed. This will include any brokerage/cash accounts, your real estate, and any other investment held outside a qualified plan. Unfortunately, the laws of intestacy vary greatly from state to state, thus you must have a strong understanding of your own state’s very complicated system. There can be further complications if you have property in different states (most importantly real estate).

For instance, in Illinois, if you have children but no spouse, your children will inherit all assets, and vice versa. If you have a spouse and children, your spouse will get half of your assets, while your children will obtain the other half. Thus, your spouse may be put in a precarious position of not having enough assets to last a lifetime (especially if such spouse does not have many assets in his/her own name), while your children may have an abundance of wealth that your spouse may not have direct access to.

What happens to my assets with no estate planning, Part Deux - Probate

There is also the issue of probate. For instance, in Illinois (this differs from state to state), your spouse will need to “probate” any assets that are in your name that are not beneficiary designated (again, qualified plans/life insurance) that total in aggregate over $100,000. That is a mouthful – what does that mean? Probate court (as briefly discussed above) is the legal situs where a deceased individual’s estate is settled. Let’s assume you have a piece of property that is owned outright by your spouse that is worth $300,000. Since this real estate is a) not beneficiary designated and b) totals over $300,000, it would be subjected to probate court. The term aggregate is also important; alternatively, your spouse can have 10 bank accounts owned in her name that are worth $11,000 each, but since in aggregate they are worth over $100,000, they would be subject to probate.

Is probate court worth avoiding? Very much so. Most often, what happens during a probate estate is nothing more than clerical. In the vast majority of cases there's no conflict, no contesting parties, none of the usual reasons for court proceedings. Probate rarely calls for legal research, drafting, or a lawyer's adversarial skills. The probate attorney, (or more likely the attorney's secretary), fills in a small mountain of forms and keeps track of filing deadlines and other procedural technicalities that can vary from state to state. The probate attorney may need to appear in court (or not), and many times this entire process can be done by mail. However, it is a time-consuming process, and lawyers charge for their time. The attorney is allowed “reasonable” fees for his time, and such fees do not come cheap. Even a “routine” probate estate with a gross value of $400,000 (little more than a home, a few bank accounts, cars/personal property) can amount to $20,000 with ease. For more complex cases, they can run significantly more and even approach six figures!

“I have a will, I am set”

I cannot count how many times I have heard this in my career. Having a simple will is a decent start for estate planning, but rarely do I feel it is sufficient. However, there is one situation – if you are a single individual with no children with most of your net worth tied up in qualified plans/life insurance (and thus do not meet the bar for probate court). In all other cases, more advanced planning may be needed.

Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors Corp. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.

CRN-2440624-022719

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