Estate Planning Basics

A seemingly basic, yet often overlooked aspect of financial planning is estate planning. There are many reasons that people may not have addressed even the most simple of estate planning issues. Some people think they don’t have enough assets to worry about, others mistakenly believe their spouse will inherit everything if they die, but most people simply have not gotten around to it. Let’s address some estate planning basics. For many people, gone are the days when you would draft a will, and direct all assets to it. Because a will has to go through a lengthy and often expensive process, called probate, simply leaving your assets to your will is one of the least efficient ways to pass on your assets. That is not to say that a will is not an important document, but today it is often used as a catch-all for passing assets that cannot be passed in a more efficient manner. When drafting a will, be sure to use an attorney who specializes in estate planning. Not all law is the same, and you want to help ensure that your document is as complete and accurate as possible. Probate is a public process, and can be subject to challenges by potential heirs with an axe to grind or who simply feel they have a claim to your estate. A well-written will could be all that protects your intended heirs. In addition, when drafting a will, many attorneys recommend speaking in terms of percentages, rather than in dollar figures. For example, you may have a mind to leave a token $20,000 inheritance to a favorite niece, and the remainder to your spouse, but if you die with only $20,000 to your name, your niece will get it all, and your spouse may end up with nothing. Using percentages could help alleviate this issue by using language like, “3 percent, but not more than $20,000.” Again, your attorney will advise you on the exact wording, but you can see how this language could alleviate any confusion and help ensure your intended wishes are carried out. So, if a will is not the most efficient way to pass assets, what is better? Utilizing accounts with beneficiary declarations is an extremely efficient way to pass your assets. At your death, these assets will pass to your stated beneficiaries immediately and without the expenses related to probate. In many cases, at your death, your beneficiaries would simply need to prove their identity, complete a few forms, and they could receive funds in just a few days. Assets that can have beneficiary declarations include: your retirement plans at work, IRAs, life insurance, non-retirement brokerage accounts with Transfer-on-Death designations, etc. Most of these types of assets allow you to designate primary and contingent beneficiaries to account for instances when your primary beneficiary may predecease you, or pass in a joint event. It is supremely important that your beneficiary designations be up-to-date. Many people mistakenly believe that if their will and their beneficiary declarations don’t match, that the will will prevail, but that is simply not the case. Make sure to update and review your designations on a regular basis to ensure that they reflect your desires. Updating these designations usually only requires a form, as opposed to changing a will, which could require a complete redrafting. Finally, to those who think that if they die, their spouse will just inherit everything: you may be making a huge mistake. In New York, if you die intestate (that is, without a will), and you do not have beneficiary declarations on your accounts, your assets will flow to your heirs according to statute. What does that mean? Well, assuming you have a spouse, and legally recognized children, your spouse would generally inherit the first $50,000, but would only be entitled to half of your assets exceeding that value. The other half would be divided among your children. So, if you die intestate with a $500,000 IRA without beneficiary designations, your spouse would inherit $275,000, and your children would get the balance. You may say, “that’s fine, they’ll just cash it out and give it to their mom,” but chances are your working children are in a much higher tax bracket than their retired mother. Since it’s an IRA, any distributions would be fully taxable at their tax rate, so what would your spouse be left with? You may say, “that’s fine, they’ll simply disclaim the inheritance, and it will go back to their mom,” but in New York, disclaiming an inheritance may make you ineligible to receive Medicaid in the future. So, long story short, if you want to ensure that your assets pass to the people you intend, as completely and efficiently as possible, at a minimum you should make sure that your beneficiary designations on all eligible assets are updated, that you have a will drafted by a qualified attorney, and that you review both on a regular basis. More complicated estate strategies certainly exist, and can be explored with your financial advisor and estate attorney, and we recommend that you speak with both. Stephen Kyne is a Partner at Sterling Manor Financial, LLC in Saratoga Springs and Rhinebeck. Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, an SEC registered investment advisor or Cadaret Grant & Co., Inc. Sterling Manor Financial and Cadaret, Grant are separate entities. Sterling Manor Financial does not provide tax or legal advice. Consult with your qualified legal or tax professional to discuss specific implementation.