Financial Boot Camp Series: Is Your Estate in Proper Order?

Estate planning is the process of identifying one’s assets and providing clear instruction for who receives what assets, when they receive it, and any additional terms associated with inheritance of these assets. Regardless of the size one’s estate, everyone has a financial estate that at some point will need to be administered. Despite the importance of ensuring your financial affairs are well organized, allowing your loved ones to efficiently administer your estate as desired, only 40% of U.S. adults have a will or living trust, critical pieces to a well-organized estate plan. While we acknowledge typical reasons cited for delaying or ignoring estate planning altogether, including not wanting to think about one’s passing, being “too young to worry about it,” or thinking that it’s too expensive, unfortunately by not organizing your financial affairs you are leaving a potentially complicated future problem for loved ones to resolve without any guidance. In this note, we illustrate planning strategies utilized by individuals to ensure efficient and cost-effective future estate administration.

An understanding of one’s overall estate plan begins with understanding one’s current financial estate. This entails summarizing an individual’s current assets (including cash holdings, taxable investments, tax-deferred accounts, real estate, life insurance, business interest, and other assets) and liabilities (mortgages and other debts) to gain a full understanding of their current financial landscape. Along with current assets and liabilities, an individual should also be aware of current and future spending/saving aspirations and other key financial factors such as pension, social security, or rental income(s). With this understanding of one’s current finances, estate planning then transitions to whom and how they’d like their assets to flow in the future.

When an individual passes away, a comprehensive review of their financial picture is performed and could start the probate process (depending on complexity, asset titling, state law, and other factors). Probate is the legal process of analyzing a deceased’s assets, determining one’s heirs, with probate proceedings typically focused on the existence of a will. Probate is a state court proceeding and, as a result, becomes a matter of public record, meaning anyone could go to the courthouse to view an entire estate probate file. Again, depending on the complexity of the estate and state-specific estate laws, probate costs could range from 4% to 7% of the total estate value as additional professional service providers are required (i.e. attorney, accountant, and appraisers). Given the potential cost of the probate process along with one’s estate becoming public record, probate avoidance is a typical estate planning goal for individuals. 

Assets that are titled in the name of the decedent (i.e. individual name) or held jointly as tenants in common that do not provide clear future directive for how they should be distributed to future heirs must be probated. Therefore, when reviewing account titling with individuals seeking to avoid probate, we typically recommend titling assets as one of the following:

• Revocable Trust – A revocable trust is created by individual (grantor) and an attorney providing clear instruction for how trust assets will be managed by a trustee(s) and ultimately transferred to beneficiaries upon the grantor’s passing. When creating the trust agreement, an initial trustee (typically the grantor) and a successor trustee (an individual that becomes trustee upon the grantor’s passing) would be named. A key benefit of revocable trusts is the ability to alter and adjust key trust terms throughout one’s lifetime. Trust language can be as flexible as needed to provide guidance on the management and distribution of trust assets. In addition, trust language can provide specific timelines regarding distribution of assets to beneficiaries and dictate if those beneficiary distributions are to be made outright or held in future trust. The flexibility to adjust trust terms throughout one’s lifetime and provide specific guidance, along with assets titled in the name of a trust being distributed per the terms of the trust and thereby avoiding probate, are why revocable trusts are a commonly used by individuals for account titling.  
• Transfer on Death / Payable on Death – Upon one’s passing, the named beneficiary will inherit the asset automatically without probate. 
• Joint with Right of Survivorship – If an asset is owned jointly with someone, the surviving owner automatically owns the asset when the other owner passes away.

While not a method of titling an asset, a review of one’s beneficiary designations is also recommended to ensure they are up to date. Beneficiary-designated assets would include individual retirement accounts (IRA) and Roth IRAs, qualified retirement plans (i.e. 401(k)), and life insurance policies. Beneficiary-designated assets will transfer to the named beneficiary(s) upon one’s passing, again, without probate court oversight.

Having worked with clients on their initial estate plan construction and, ultimately, administration, the key to a successful and cost-efficient estate plan is the review of one’s personal balance sheet combined with ongoing dialogue about the client’s overall estate goals. Ensuring estate documents such as a will and/or trust documents have been created, periodic review of key estate factors (i.e. trust provisions), and confirmation of how various personal assets are titled (i.e. individual, joint, or trust name) is a key part of financial planning. If this proactive estate planning is not accomplished, fairly straightforward estates, let alone more sophisticated estates such as the musician Prince’s estate, can be stressful, time consuming, and, ultimately, expensive to administer and typically something no one wants to leave for loved ones to resolve.

If you have questions about your estate plan and how your accounts are titled, contact your financial advisor. If you don’t have an advisor, one of our Schneider Downs Wealth Management Advisors would welcome a conversation with you.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.