Last week was Good Friday, the Christian holiday remembering the crucifixion of Jesus Christ. It is a day of fasting and charitable deeds by the faithful. It also marked the beginning of Easter weekend which culminated on Sunday with the celebration of the Resurrection. This holy day can also serve as a practical reminder that death is a certainty in life, especially given the current pandemic that has given us all an opportunity to more carefully consider our own mortality.
Planning for death is not a light topic, nor is it one that many of us care to discuss unless we experience events that jar us into action. For example, it is common to buy life insurance upon the birth of a child or create a will upon the death of someone close to us. But there are many other considerations that we should regularly take into account, and today is a Great Friday to take a look at our own plans.
It isn't that we purposely do things that create estate planning complications for our heirs, it is more the dynamic nature of our lives that lead to unintended consequences. Take for example the true story of an interaction I had with a client early in my financial advising career.
The Giddy “Ex”
“Hi, Jeff, you probably don’t remember but you helped me set up an IRA after my divorce a few years ago,” said the voice on the other end of the phone. “I’d like to come in to discuss investing some other money.”
Janice was giddy. Since her divorce, like many single parents, she had struggled to make ends meet. The IRA I had helped her establish was part of a Qualified Domestic Relationship Order (QDRO) where she received a portion of her ex-husband’s retirement account. She had subsequently withdrawn much of those funds to help make ends meet.
The reason for her joy? Her ex had recently passed away. She told me that she grieved the death of the father of her children, but she celebrated a seemingly small detail that had been overlooked by her former husband. When their first child was born 19 years earlier, he had taken out a 20 year term life insurance policy for $1,000,000. Janice had been named the sole beneficiary. He never changed that detail, even though he had remarried and had another child.
When I asked her if she felt sorry for his widow, she just smiled and nodded.
The PO POA
Then there was another time when I was managing an office in California for a major brokerage and investment company.
The young lady sitting at my desk was understandably upset. She had dropped of some paperwork at the front desk of the office with one of our junior representatives that worked the counter. The paperwork was properly completed and granted her Power of Attorney (POA) over her ill mother’s account. She had asked the representative if “this will let me take care of everything?”
The representative correctly replied, “This will allow you to act in your mother’s place.” However, it was what the rep didn’t say (or ask) that led to a problem later on.
The mother passed away a few months later and the daughter had come back to the office to inquire as to what needed to be done to transfer her mother’s accounts into her name. We reviewed the accounts and saw that there were no named beneficiaries on file. Absent beneficiaries, we informed the daughter that the IRA would be probated and that the assets could be distributed via the Executor.
"But I have Power of Attorney!" she protested.
HAD POA. She learned belatedly that the power is only valid during the principal's (her mother) lifetime. That now presented other issues.
Problem one was that in her mother’s state of residence, California, the probate process was expensive. In this case, her $250,000 of assets in the accounts were going to cost about $8,000 to probate. The second was that without a named beneficiary the IRA would have to be distributed over a five year period, resulting in less opportunity for tax deferred growth and potentially higher income taxes being owed.
If beneficiaries had been named, all of those assets would have avoided probate and the associated costs. In addition, the assets could have been distributed over a longer period of time.
She had asked to speak to me so that she could complain about my representative’s lack of understanding of her needs resulting in an expense and hassle that she had wanted to avoid. I totally understood and empathized with why she was frustrated but I also couldn’t fault my employee, who was basically a counter clerk, for not diving deeper in to the daughter’s meaning when she correctly answered the daughter’s question about taking care of “everything”.
In both cases, unintended outcomes could have been easily avoided. Discussing these issues regularly with an advisor is probably the best solution but the following tips can get you well on your way to ensuring that your plan has a better result.
6 Estate Planning Tips
All of the issues facing these clients were essentially simple administrative issues, until the the owner passed away. At that point, it became much more burdensome and expensive for the heirs to deal with lawyers, judges, and the IRS.
Keeping that in mind, here are 6 tips for reviewing your estate plan on this Friday, or any other day for that matter.
Review Beneficiary Designations
Life Insurance and retirement account beneficiary designations should reflect your current family situation and be consistent with your will and/or trust. These designations, if established correctly, avoid the probate process.
Update Out of Date Documents
Your estate plan should reflect your current wishes—not your wishes from 20 years ago. Review with your advisor every year to ensure what you think is taken care of actually is.
Plan for Incapacity
The chances of being incapacitated at some point before you die are pretty high—your estate plan should include an incapacity plan that includes Power of Attorney and Health Care Directives.
Title Your Accounts Correctly
Title to your assets play a large part in how they will pass upon death Living trusts are a great tool but if you don’t take time to change the title on assets and fund the trust, it probably isn’t worth the paper it is printed on.
Joint Tenants With Rights of Survivorship (JTWROS) allows assets to pass to a joint owner easily but may complicate or even invalidate some common estate tax management approaches. Adding a child’s name as a joint owner of an account may sound like a good idea at first, but what happens to the assets in that account if you die? Will your other kids be upset since it all legally goes to just one child? What if the child you name as an owner has lawsuit or creditor issues?
Protect Assets From The Next Spouse
Ensure your children receive their inheritance, even if your spouse remarries after your die—but, do this in a tax effective method.
Don’t Forget About Disability
According to the SSA’s Disability and Death Probabilities, a male born in 1996 has about a 20% chance of becoming disabled before retirement age. Unlike death, with a disability you not only lose your earning potential but continue to need to support your family AND yourself.
If you would like to review your plans, investment or estate wise, today is a Great Friday to get in touch for a review.