Why Your Estate Plan May Not Work: Basic Steps to Plan Implementation

Transcription

1 The following information and opinions are provided courtesy of Wells Fargo Bank, N.A. Why Your Estate Plan May Not Work: Basic Steps to Plan Implementation Prepared by : Wells Fargo Investment and Fiduciary Services. In this white paper 1 Types of property 2 Problems with titling 3 What can I do?

2 Why Your Estate Plan May Not Work: Basic Steps to Plan Implementation The estate planning process can be difficult. It involves contemplating your own mortality, trying to decide how best to provide for loved ones when you re gone, and grappling with potential tax consequences. It means finding a lawyer who is technically competent, empathetic, and responsive. Sometimes it means having difficult family meetings to discuss how wealth is to pass to future generations. Small wonder, then, that so many people haven t addressed their estate planning needs. Perhaps the worst part, however, is that even those who have successfully dealt with all of these problems and have gone through a comprehensive planning process may not have finished the job if they haven t transferred their assets to the accounts or trust structures recommended during the planning process. The way a person owns his or her wealth can have a huge impact on whether that wealth will actually pass at the person s death according to plan. In other words, the way in which assets are titled can either support or undermine a person s estate plan. This paper will discuss in general terms the way property can be owned, the typical problems that arise as a result of specific ownership structures, and some ideas for ensuring that the titling of assets is consistent with the planning a person has already done. I. Types of property. Property can be owned in many different ways. It might be helpful to think of the different types of ownership as follows: Single ownership property. This includes property held in a person s sole name or property owned with another person as tenants in common. It does not include survivorship property. Neither does it include retirement plans or life insurance, both of which have special features as they pass to beneficiaries at the death of the owner. Right of survivorship property. This includes jointly owned property that passes automatically to the surviving co-owner at the first co-owner s death. This property is commonly known as joint tenancy with right of survivorship (sometimes abbreviated as jtwros ). There is a special subset of jtwros property, available only to spouses, known as tenancy by the entireties. It is only available in certain states and often in those states (especially in the case of real property) if spouses take property as husband and wife, they automatically own that property as tenants by the entirety. Beneficiary designation property. This is simply property that is owned by one person and that passes at death by beneficiary designation. It includes life insurance and annuities, individual retirement accounts (IRAs), 401(k) plans, and many types of employment benefits, such as stock options and deferred compensation. Community property. Certain states are community property states, which means, generally, that ownership of any property acquired through a person s earnings while that person is married is shared: one half by that person and one half by his or her spouse. This is true even if the property is owned in one spouse s name only. Property acquired before the marriage, or by gift even during the marriage, is typically referred to as separate property. Community property is not really a separate type of property, but can affect other types of property ownership. For example, if a husband purchases a life insurance policy with his earnings while he is married, his wife will automatically own one-half of the insurance policy and is entitled to half the death benefit, regardless of the beneficiary designation. Trust property. This is property that a person has transferred to a trustee. The reason for doing so is to ensure that property is managed by the trustee for the benefit of the beneficiary, or in the case of revocable living trusts ( revocable, meaning it can be revoked, and living, meaning it is created during the grantor s lifetime), to ensure that trust property avoids the probate process and can be managed by someone else in the event that the person who created the trust becomes incapacitated. A trust agreement operates only over those assets held in the name of the trustee. So if a grantor creates a trust but fails to transfer assets to it (known as funding the trust ), it may not work as it was intended. 1

3 How Do Assets Pass to Heirs? Beneficiary Designation Property Single Ownership Right of Survivorship Trust n Life insurance. n Pension plans. n IRAs. n Annuities. n Payable on Death accounts. The Probate Process. n Prove validity of the will. n Pay off debts. n File tax returns and pay taxes. n Distribute assets. n JTWROS real estate. n JTWROS bank and investment accounts. n Revocable/living trust assets. To beneficiaries. To heirs and legatees. To survivor. To principal and income beneficiaries. Source: Wells Fargo Wealth Management. II. Problems with titling. The answer already has been alluded to: how property passes at the owner s death depends upon what kind of property it is and what kind of planning has been done. These issues, generally known as titling of the assets, can alter or defeat the estate plan you thought you put in place. To understand the issue fully, it s important to know what happens to property at death: n Property a person owns outright passes through probate, the court-supervised proceeding that ensures that bills are paid, assets are maintained, and heirs receive the assets to which they re entitled. Assets going through probate pass either according to a will (if there is one) or intestacy, which is the state law mandating where property passes if there is no will. Although the laws of intestacy change from state to state, in general, property passes first to a surviving spouse (or to a surviving spouse and children, if the surviving spouse is not the parent), then to children, then to parents, and so on to more distant relatives. n Property owned by a trustee passes according to the trust agreement. The trustee holds legal title to the property, while the grantor and beneficiaries have beneficial interest. n Beneficiary property (e.g., life insurance, IRAs, and stock options) passes according to a beneficiary designation, not through probate unless there is no completed beneficiary designation form. n Survivorship property passes to the surviving co-owner. The potential conflicts between an estate plan and asset titling are obvious. For example, let s say a person drafts a will leaving everything to his or her children. But that person s assets consist solely of life insurance and retirement plans, and the beneficiary designation form named the person s spouse. Those assets don t pass according to the will and the spouse would receive everything and the will literally wouldn t be worth the paper it was written on. Similarly, if a person creates a revocable living trust in order to avoid probate, but does not change the ownership of all of his or her assets to the name of the trustee, then those assets may have to pass through the probate process. And even if the assets eventually find their way to the trustee after probate is over, the benefit of having the trust in the first place won t be realized. Any experienced estate planning lawyer will have his or her share of stories about assets passing to the wrong 2

4 people (for instance, beneficiaries who once were to receive property but became estranged from the decedent) because the asset titling wasn t changed to reflect changes in the estate plan. There also are many examples of elder abuse, in which a housekeeper or even a relative tries to defeat an elderly person s will by changing the titling of assets so that they are held in survivorship form, passing solely to the abusive person and not under the will. Equally, estate planning lawyers alone can t be relied on to solve the problem because most clients only talk to their estate planners once every five or ten years. Even if the lawyer ensures that assets are properly titled at the time the estate plan is completed, the clients often acquire new assets afterward, and those assets are generally the ones that cause the problems because they have not been reviewed to ensure that they are owned in the proper form. III. What can I do? To avoid this problem, you need to review (or have someone review for you) all of your assets in light of your estate plan every year to ensure that these problems won t arise at your death. You can perform this review yourself by undertaking the following steps: Build a comprehensive personal balance sheet. Make a list of all of your assets, including life insurance and retirement plans. In a separate column next to that list, indicate the way in which each asset is held; for instance, trustee, individually, jtwros, and so forth. For any beneficiary designation property (usually life insurance, retirement plans, and corporate benefits), list who is named as primary and secondary beneficiaries. Determine your estate plan. Determine what kind of estate planning documents you have. A will? A revocable living trust? Nothing? Interestingly, the latter can be a perfectly reasonable answer for some younger professionals who don t have children because they tend to have only beneficiary designation property and aren t readily concerned about creating trusts for others when they are gone. Compare asset titling with your plan. It should become apparent fairly quickly if there are gaps. For example, if you have a revocable living trust, but your assets are owned in your own name generally, you have a problem. If your will says everything passes to a trust for your spouse s benefit, but your large life insurance policy names your spouse as an outright beneficiary, you may have a problem. Retitle or seek professional advice. Not all apparent inconsistencies are actual problems. For example, many estate plans leave property to a spouse in trust, rather than outright, but intentionally name the spouse as the outright beneficiary of retirement plans because there may be income tax benefits to doing so. Before making any changes, you should check with your estate planning lawyer or fiduciary professional to determine the appropriate planning strategy to align to wealth and legacy goals. Wells Fargo has a team of fiduciary professionals and other advisors who would be happy to help you with the coordination and implementation of these basic steps if you wish. Your estate plan is a critical component of your financial and lifestyle planning. You may have invested a great deal of emotional energy (not to mention legal fees) in establishing a plan that truly reflects the values that you want to pass along with your wealth. Don t let that work go to the wayside because of titling problems. 3

5 Disclosures. Wells Fargo Wealth Management and Wells Fargo Private Bank provide products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company. Wells Fargo Bank, N.A. (the Bank ) offers various advisory and fiduciary products and services. Financial Advisors of Wells Fargo Advisors may refer clients to the bank for an ongoing or one-time fee. The role of the Financial Advisor with respect to bank products and services is limited to referral and relationship management services. The Bank is responsible for the day-to-day management of non-brokerage accounts and for providing investment advice, investment management services, and wealth management services to clients. The Financial Advisor does not provide investment advice or brokerage services to Bank accounts but does offer, as applicable, brokerage services and investment advice to brokerage accounts held at Wells Fargo Advisors. The views, opinions and portfolios may differ from our broker-dealer affiliates. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. Wells Fargo affiliates may be paid a referral fee in relation to clients referred to Wells Fargo Bank, N.A. The information and opinions in this report were prepared by Wells Fargo Private Bank. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Private Bank s opinion as of the date of this report and are for general information purposes only. Wells Fargo Private Bank does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. This information is provided for education and illustration purposes only. Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state. Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared Wells Fargo Bank, N.A. All rights reserved. Member FDIC. NMLSR ID TPB01404 (IHA ) Valid through 01/01/2018 CAR