Whenever I start a discussion about estate planning, one story always comes to mind. Early in my career, I worked with a couple who had just completed a sophisticated will, drawn up by a top estate planning attorney. The husband had a straightforward plan to leave half of his estate to his wife and the other half to his three children from his first marriage, which was indicated in his will. Given the extent of the work already done, I didn’t expect to add much value for my clients, but I proceeded to audit the beneficiary designations and titling to determine their effect on the distribution plan.
The result of the audit? The distribution didn’t match the couple’s goals — not even close! The husband’s will left the real estate to his wife. The couple had also set up Joint Tenants with Right of Survivorship (JTWROS) brokerage accounts, so the titling directed the accounts to his wife, outside of the will. Additionally, she was named the beneficiary of his life insurance. If the estate had been executed according to that plan, he would have unintentionally disinherited his first three children! Fortunately, with the complete audit and a clear understanding of who they wanted to benefit in their wills, the couple was able to coordinate their assets to meet their original intentions.
There seems to be a common misperception that a will controls the distribution of all property. In fact, any asset with a beneficiary designation, such as a 401(k) or Life Insurance, as well as titling provisions and certain business agreements supersede a will. Many of us go through life opening accounts and executing contracts as needed without realizing the impact these momentary decisions have on our overall estate plan.
Here’s the good news — starting the process gets a little less complicated once you realize that there are only 3 possible beneficiaries of your estate:
- Family — Immediate family member, relatives or friends may receive a portion of your estate. You can choose who, how much and when they get it.
- Charity — If the goal is to zero-out estate taxes, you can send 100% of your estate to charity and avoid all taxes. However, your family may complain! Another option is to send the tax free amount to your family and everything above that threshold to charity. Ultimately, your hard earned dollars can be directed to causes you are passionate about rather than the general treasury of the U.S. government. The benefitting charity must be a qualified 501(c)3 charity recognized by the IRS. Speaking to a charitable planning specialist can help you effectively allocate among charity and family.
- The IRS — When an estate exceeds the threshold set by federal tax law, the IRS levies an estate tax on every dollar transferred over the threshold, set at $5,340,000 for 2014, which rules out taxes for most of us! If you are among those few who have crossed that mark, 40 cents of every dollar winds up with your silent partner, Uncle Sam — even if you haven’t named him as a beneficiary!
Here’s an exercise to try. Start with just one dollar and allocate a percentage of that dollar among family, charity, and the IRS to reach one hundred percent. After you have made the selection, thoroughly coordinate your titling and beneficiary designations with your will to avoid unintentional disinheritances!
A will is not the silver bullet that solves all of your financial distribution goals. It is merely a starting point for a comprehensive estate plan. Once you’ve determined how to allocate among the 3 possible beneficiaries and coordinated assets with your will, estate planning doesn’t have to be a daunting task.
Deborah Stavis is a member of the DailyWorth Connect program. Read more about the program here.
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