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

Robert Valentine asked:


When Elvis Presley died, his estate was worth over $10 million dollars1. Then it went through probate.

After appraisal costs, legal fees, executor’s fees, and estate taxes, “The King’s” estate was left with only $3 million.2 Because of improper estate planning, a whopping 73% of Elvis’ estate was wiped out. So what did all that money pay for? And how can you avoid some of the same mistakes? Let’s find out.

Probate is the (usually lengthy) process of proving if a will is valid, clearing your estate of any debt, and making sure that no one challenges it. All of this takes place in court, which adds to the costliness. Will or no will, an estate must go through probate.

But there are ways to reduce or eliminate costs associated with the complicated legal process. One of the most efficient includes establishing a trust. Assets and property within a properly drafted trust don’t have to pass through probate. On top of that, upon death, assets are passed on relatively quickly, especially when compared with probate. Your assets are also more protected from creditors when placed in a trust.

But trusts aren’t your only option. If you choose not to establish a trust, there are several ways you can help reduce costs. One of the best and easiest ways is to be prepared. If you have a 401(k), an IRA, a life insurance policy, or all three, then you have three separate beneficiaries to name. By routinely updating your beneficiary designation, you avoid unwanted inheritances and ensure that your wishes are carried out. Any assets that pass through beneficiary designations aren’t subject to probate, which makes their accuracy even more crucial.

You can also choose to own assets jointly with someone else. From stocks to houses, if you own something jointly, that property is passed onto the survivor automatically. Also, many brokerage houses and banks allow you to name a beneficiary on your personal accounts by establishing a TOD (Transfer on Death) account. It’s one more way that your assets will pass relatively quickly and easily to whomever you wish. Upon death, your accounts and their contents will be passed to whomever you’ve named.

One other option is to gift your assets to family or friends before you pass away. By gifting the maximum tax-free amount each year ($11,000 in 2005), you reduce the amount of your estate, which, in turn usually reduces the amount of probate costs, which are usually based on the total estate value.

By properly planning your estate with a financial professional and an estate planning attorney, you can increase your chances of decreasing probate costs and avoiding costly mistakes. While not many people like to discuss their own mortality, the thought of family, friends, or charity losing large percentages of their inheritance and your estate to costs, fees, and taxes, should be enough for anyone to start planning.

While Elvis’ estate may have been improperly managed early-on, since being bought out by his former wife, Priscilla and their daughter, Lisa Marie, it has become a major success story. With the proper management it has grown from a paltry $3 million, to over $250 million.3

The lesson to be learned lies in the stark contrast between proper and improper estate management, and shows how important an estate plan is, whether you’re “the King,” or not.

1 Back Room Technician, “Estates of Famous People” chart

2 Stevens, Sue. June 30, 2005. Avoid the Estate Planning Blunders of Marilyn and Elvis.

3 Floyd, Elaine. March 16, 2001. Elvis Lives! Or His Estate, at Least, Is Very Healthy.



Raul