A bucket list includes all the things you hope to accomplish in your lifetime – dream trips, family plans, personal accomplishments, the list can be long. One item that may get overlooked is what impact and legacy do you want to leave after you are gone. A lifetime lived usually means there are assets, needs to be taken care of after death. Death is never a comfortable subject, but the reality is that you need an estate plan so you that when you pass, you can leave behind what you want to and to who you want. Unfortunately, we’ve seen what can happen when estate planning is overlooked.
Everyone with dependents needs an estate plan!
There are many misconceptions about estate planning. A lot of people believe that estate planning is only important when you’re older, when you have a lot of money or if you’re sick. But this couldn’t be further from the truth.
Having an estate plan is important for anyone who has children – who will care for your children if you unexpectedly pass away? It’s also important for business owners, anyone who owns property or anyone who has something to lose – where will these assets go when you’re gone?
Discussing your death can be uncomfortable, but it’s an important conversation to have. At Rock House Financial, we’ve seen first-hand what the chaos of not having an estate plan can look like. Below are 4 real-life scenarios that we’ve seen happen to clients.
Scenario #1: Your Business Partners are Left with Nothing
At Rock House Financial, we work with a lot of small business owners. Unfortunately, many business owners believe that a verbal plan is enough to pass their company on to their partners, their children or their spouse. But it’s not.
If you own a business and pass away without having a succession plan in writing, your plans – and even promises – may not go as planned. Just because you tell your business partners from the start that they will inherit your company or be able to buy it when you’re gone, if nothing is ever set up in writing, the state in which you operate in will ultimately decide.
A business that you and your partners worked hard to get started, regardless of how much blood, sweat and tears they may have put in, could instead go to your kids, leaving your partners nothing and changing their futures completely.
Scenario #2: Your Children Start Fighting
A common mistake within an estate plan is people not having beneficiaries listed on all of their accounts, or not updating them.
Many times, people start out with the best intentions. For example, they may list their daughter as the beneficiary on accounts intending that she acts as the executor and split the assets equally between all the children. However, when she is listed as the only beneficiary all assets are legally hers . Even if your children are close and promise to share any inheritance, they may not be able to because of hefty gifting rules and taxes.
This can also happen if the trust was not properly funded and some of the assets are outside of the trust.
We have seen this happen to some of our clients, and we have to be creative to find other ways to give the kids their fair share. It can create a big mess for the executor and end up costing the family big fees to get it cleaned up.
Doing estate planning should also include communicating your intentions to your children. Providing them with proper expectations such as
- Why you chose one child to be the trustee or executor. It should not always just be the oldest child. (Don’t we have a blog on choosing a trustee?)
- That one child will receive a larger portion. Perhaps due to special needs or greater financial need.
- Special clauses or provisions in the trust. Such as protecting assets in a divorce or overspending.
- Your desire that they do not liquidate an asset such as a vacation home or farmland, why, and how to pay for maintenance.
- And many more reasons to communicate.
Scenario #3: Your Spouse Doesn’t Know Where to Start
Another common oversight in an estate plan is not sharing a list of accounts, access to these accounts or passwords with their spouse or the executor of their will. When this happens, spouses are often left trying to figure out what’s left where.
It’s common in couples for just the husband or just the wife to handle the finances. But if that person passes away, the other doesn’t always know where to start. In addition to grieving the loss of their spouse, they are also left the financial burden of filling in the gaps.
Having the executor of your will aware of what you have to leave behind can make things a lot smoother and can prevent your spouse from having to submit a death certificate every time he or she needs access to a different account. Again, think of this as next level financial planning!
Scenario #4: Funds Not Accounted For; Money Lost
Another thing we do for clients when incorporating their estate plans into their financial planning is consolidating accounts. Many people have many different retirement funds and savings accounts. If they’re consolidated when you pass away, your loved ones will only have to go to one or two places to claim assets to several accounts. This can turn 15 sets of paperwork into just one for investments. Consolidating everything into one trust can also help divide assets among multiple beneficiaries.
Scenario #5: Lengthy and Expensive Court Procedures
Not doing your estate planning could mean your beneficiaries have to go through probate to settle your estate. This involves time and legal fees. And it’s a public process, so no privacy about your assets.
If you listed minor children as beneficiaries, they cannot legally inherit many types of assets. If you have not designated a guardian, the state will appoint one. This could lead to cumbersome conservatorships requiring legal fees, court approval for distributions and investment changes, and regular reporting. The money may not get used as you wish for your children. If you instead put a trusted adult as the beneficiary and expect them to use the money for your kid’s benefit this can result in unintended tax consequences. As well as the money not passing to your children as they become adults.
If you become unable to make financial or medical decisions, and you have not appointed a power of attorney, the court will appoint a guardian for you. And that guardianship will be monitored by the courts resulting in your family needing to keep careful records, go to court regularly, and following rules on how your money is spent. This can be a hardship on the family, taking time off from jobs to go to court and paying large legal fees.
Where to Begin on your estate plan
The first step in getting your estate plan together is asking yourself some important questions:
- Are there specific assets you want to leave to specific friends, family members or a particular charity?
- If you have children, who would you like to care for them?
- Do your children have any special needs you should consider?
- Are there certain plans on your bucket list that you’d like to take care of, even if you’re gone, such as paying for your daughter’s wedding or sending your grandchildren to college?
- If you have a business, have you designated a plan for what will happen to it in the event of your untimely death?
The next step is finding the proper estate planning professional. Usually folks work with an attorney to draft the legal documents for their will and estate plan, as well as healthcare proxy documents. Finding someone you trust is critical. We recommend asking around within your circles, conducting searches on Google or social media, and even asking your accountant or financial advisor.
If you don’t have a proper estate plan in place, the state in which you live in does. And chances are, you won’t like it.
If you die intestate (without a legal will), your assets will go into probate, and this process can take years, which can put your family at odds. We’ve seen multiple scenarios where not having an estate plan in place can leave a family with a lot of stress and arguing over who should get what.
Being prepared and making sure you have gathered everything on our bucket list can help you and your family tremendously – being able to avoid probate, preventing headaches and avoiding costs for your executor.
At Rock House Financial, a fee-only financial advisor in Davis County, Utah, we are charitable giving tax mitigation specialists. We work with families, business owners, and individuals who wants to make an impact through giving.
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