Robin S. Davis, CFP® asked: Most of us remember when Elvis Presley, “The King:, died in 1977. At that time his estate was worth an estimated 10 million dollars. Unfortunately, due to probate fees, legal fees, and estate taxes the amount was reduced to a paltry $3 minnion. This could have been avoided with the use of proper estate planning tools.
Probate is the legal process in which a court oversees the distribution of property left in a will. In the event that an estate must go through the probate process, the named executor of the will represent the deceased person in order to receive a legal document called letters testamentary, allowing them to pay any outstanding debts and funeral expenses, file necessary tax returns, and transfer the titile, or name, on the accounts to their respective beneficiaries. This process can be intimidating and expensive. By reorganizing your assets, you can help avoid probate for your heirs.
If you are single, it is likely that your bank and investment accounts are titled only in your name. Upon your death, your assets will be distributed through probate. Joint tenancy, which is most popular among married couples, allows two people to have equal ownership of their accounts. Upon the death of one person, the remaining person becomes the sole owner of the accounts. Upon the death of the second person, the estate will then be distributed through probate.
If you are passing your assets directly to certain people immediately upon your death, the easiest way to avoid the pitfalls of probate and the expense of an attorney is to directly name a beneficiary on the account. Individual and corporate retirement plans (individual retirement accounts (IRA’s), 401k’s, 403b’s, etc), fixed and variable annuities, and life insurance policies are examples of accounts that include a beneficiary designation form. Typically you are allowed to list as many beneficiaries as you wish with the percentage of the account allotted to them.
However, accounts that do not fall into the above categories require a different tactic. This approach is to use a Payable On Death (POD), Transfer On Death(TOD), or In Trust For(ITF) designation in the title of the assets. An example would be titling a mutual fund account as “John Doe and Mary Doe, POD Jane Doe. Upon the proof of death of John and Mary, the account will be transfered to Jane. At that time, Jane shoudl re-title teh account to name her own beneficiaries.
Elvis Presley’s estate could have avoided much of the estate taxes had a little planning been done ahead of time. Another method of avoiding probate that could have been used in this case is the use of revocable or irrevocable trusts. By having the proper trust drawn up by a legal advisor, your assets can be re-titled to the name of the trust. The assets and property are then owned by the trust that do not have to pass through the probate court and go directly to the beneficiaries, relatively quickly.
Another option is to give yoru assets away to your heirs while you are living. As of 2008, you can make a tax-free gift of $12,000 per person to as many people as you want. Thsi amount is expected to increase in the future. By gifting money to your loved ones while you are alive, you reduce the amount of assets that would normally pass through probate upon your death.
To properly plan your estate, you should use the help of an estate planning attorney and a competent financial advisor. Transferring property of any significant value could have tax ramifications (estate, gift, or capital gains) that an advisor can make you aware of. Creating the necessary documents and determining the best way to title your assets, requires the best advice now, and regularly monitored updates of your beneficiaries, to avoid unwanted inheritances. Even if you’re able to protect all of your assets from probate, you may still need a will to address matters that may not be covered by other legal devices, such as naming the guardianship of your children in the case of your death.
Not many people enjoy discussing what they want to happen upon their death, however, the thought of your family and other heairs not getting what you want them to have is equally distressing.
Paula