Leave more for your beneficiaries and charities?
By Cornerstone Wealth Management
Probate costs will reduce estate size. Attorneys fees, court costs, other professional fees and expenses can result in shrinking an estate by up to five percent (5%). For example, with an estate valued at $1 million, settlement costs can be as much as $50,0001. That assumes a routine probate. In addition, the probate process can take over a year to settle.
Where does this money go? If the probate is routine, then these costs are for administration of the settlement process. Few estates require more than that. More complex probates may incur higher cost and potentially require more time to settle. Beneficiaries of small, five-figure estates may be allowed to claim property through affidavit. This option does not apply to larger estates.
The question for those who wish to manage these expenses becomes, how can you exclude more assets from the expense of probate? They key for many is to create a plan that exclude from probate as many assets as possible. What follows are four ideas that have worked for others.
- Joint accounts. Married couples may hold property as joint tenants. Jointly titled property includes a right of survivorship and is exempt from probate. At the death of the first spouse, assets then pass to the surviving spouse. State law varies on this matter. Some states allow a variation called tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship (they need consent from the other spouse to transfer their ownership interest in the property). Other states allow community property with right of survivorship; assets titled in this manner also skip the probate process.2,3 Joint accounts may still face legal challenges. For example, a potential beneficiary to assets in a jointly held bank account may claim that it is not a “true” joint account, but a “convenience account” where a second accountholder was added just for financial expediency. Or, a joint account arrangement with right of survivorship may be found inconsistent with an estate plan.4 While not a solution for all, joint accounts can be a tool that can be effective for many.
- POD & TOD accounts. Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank and investment accounts, and in some states, motor vehicles. During the life of the original owner, the named beneficiary has no rights to claim the asset. Upon the owner’s death, the named beneficiary can claim the assets or securities by showing his or her I.D. and valid proof of the original owner’s death5.
- Gifting. For 2018, the IRS allows tax free gifts of up to $15,000 per person to as many different people as you like. Gifting will reduce the size of your taxable estate. Gifting over $15,000 per recipient per year may be subject to federal gift tax (which tops out at 40%) and count against your lifetime gift tax exclusion. In 2018, the lifetime individual gift tax exemption is $11.18 million, and $22.36 million for married couples.6,7
- Revocable living trusts. In a sense, these estate planning vehicles allow people to do much of their own probate while living. The Grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. The trust owns assets once owned by the Grantor, yet the Grantor can invest, spend, and manage these assets as if it is their own while alive. Upon the Grantor’s death, the trust becomes irrevocable, and its assets should be able to be distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate), and it can save heirs court costs and time.8
Are there assets not subject to the probate fees and process? Yes, there are all kinds of non-probate assets. The common denominator of a non-probate asset is that they transfer by beneficiary designation, which allows these assets to pass either to a designated beneficiary or a joint tenant, regardless of what a will states. Examples: assets jointly owned with right of survivorship, trusts and assets held within trusts, TOD accounts, proceeds from life insurance policies, and IRA and 401(k) accounts.9
Make sure to list/update retirement account beneficiaries. When you open a retirement account (such as an IRA), you are asked to designate beneficiaries of that account. This beneficiary form stipulates where these assets will go when you die. A beneficiary form commonly takes precedence over a will.7
Your beneficiary designations need to be reviewed, and updated when appropriate. This will help prevent you from inadvertently leaving an asset to a former spouse or estranged family member.
If you are married and have a workplace retirement account, under federal law, your spouse is the default beneficiary unless he or she in writing declines. Your spouse is automatically entitled to receive 50% of the account assets should you die, even if you designate another person as the account’s primary beneficiary. In contrast, a married IRA owner may name anyone as a primary or secondary beneficiary, without spousal consent.10
If you or someone you know would like to get coaching on approaches to estate planning, we welcome your call.
#Probate #AvoidProbate #ProbateCosts #BeneficiaryDesignation #TOD #POD #EstatePlanning #FinancialPlanning #Gifting #Charity #Taxes #TaxStrategies
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
2 – info.legalzoom.com/difference-between-community-property-rights-survivorship-vs-joint-tenancy-21133.html [9/12/18]
3 – law.cornell.edu/wex/tenancy_by_the_entirety [9/12/18]
4 – clarkhill.com/alerts/a-guide-for-challenging-a-joint-account-arrangement-in-michigan [3/16/17]
5 – nolo.com/legal-encyclopedia/avoid-probate-transfer-on-death-accounts-29544.html [9/12/18]
6 – thebalance.com/how-is-the-gift-tax-calculated-3505674 [7/25/18]
7 – marketwatch.com/story/how-to-avoid-making-the-same-mistake-aretha-franklin-did-2018-09-04 [9/4/18]
8 – thebalance.com/how-does-a-revocable-living-trust-avoid-probate-3505224 [7/24/18]
9 – fidelity.com/life-events/inheritance/inheritance-basics/probate [9/12/18]
10 – connorsandsullivan.com/Articles/Beneficiary-Designations-Getting-the-Right-Assets-to-the-Right-People.shtml [9/12/18]