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March, 2017 |

23 Mar


Estate Planning for Beginners – Part 1

March 23, 2017 | By |

Where do we begin with estate planning? At the beginning, of course, which is the probate process.  What is probate?  Probate takes one of two forms.  The first is where a will is presented to the Probate Court and the second is where there is no will and the court is asked to appoint an Administrator to “probate” the assets of the estate.

In situation number one, the will is presented to the probate or surrogates court for proof.  Proof of what you may ask?  The will needs to be validated and confirmed as valid by the probate judge.  Once this is completed, the judge looks to the will to see who the deceased named as Executor and possibly Trustee and under normal circumstances, formally appoints these individuals or entities to act as Executor as provided in the will.

At a minimum, what should be included in the will? Consider the following:

1). Distribution of tangible assets (your car, boat, jewelry, clothing and other personal effects).

2)  Directions to pay all debts and taxes that may be due as of the date of death.

3). Distribution of real estate.

4). Specific bequests of money to named individuals or charities, if applicable.

5). The distribution of all of the “Rest, Residue and Remainder” of the assets

5). The appointment of the “Guardian” for any minor children.

6). The appointment of the Executor or Executors

7). The appointment of Trustees, if applicable.

The role of the named executor is to execute the terms of the will for the benefit of the named beneficiaries and report back to the probate judge for approval of the planned distributions, as outlined in the will.

To get to this point, the executor is required to notify the public that the deceased individual has passed away and that creditors have a limited amount of time to make claims against the estate.  Once all claims have been satisfied including federal and state income taxes and estate taxes, if applicable, the executor presents a plan to the court for the ultimate distribution of the assets.

If minor children are involved, the will typically names the individual or individuals who will be the guardian of the child/children.

Assuming the judge approves all that has taken place, the beneficiaries are asked to approve the plan of distribution and sign off on this plan.  It is at this point in the settlement of the estate that the assets are finally distributed to the beneficiaries and the estate is eventually closed.

But what if there is no will?  In this situation, the laws of the state take over under what is call the “Intestate Distributions “.  “Intestate” means to die without a will.

In this situation, the intestate rules (under State statutes) provides a formal plan of distribution that the deceased neglected to do themselves and believe me, this plan may leave family beneficiaries very unhappy.  Each state may be very different and these rules should be reviewed but NEVER depended upon.

In my own experience, I can outline a number of situations where dying without a will was a nightmare to settle and may rip families apart.

In our next piece, we will cover the subject of “intestate” distributions.

(For more, see: Estate Planning for Beginners, Part 2)

Please feel  free to share comments.  

23 Mar


Estate Planning for Beginners – Part 2

March 23, 2017 | By |

It may surprise a lot of people to discover how many individuals actually die without a will. Most recently, Prince. How about Michael Jackson, Howard Hughes, Abraham Lincoln, Salvatore Phillip “Sonny” Bono and Jimi Hendrix—just to name a few?

When this happens, we have to turn state statutes to determine who will inherit the assets that have no clear path to a beneficiary or heir. These assets are controlled by the state, but what does this mean? (For more, see: Estate Planning for Beginners, Part One)

How Assets Are Passed

  1. Assets may be in joint names such as:
    1. Joint tenants with rights of survivorship (JTWROS) (non-probate) or,
    2. Joint tenants as tenants by the entirety (non-probate & limited to spouses).
  2. Assets that have beneficiary designations such as:
    1. Life insurance
    2. Retirement plans
    3. Annuities
    4. POD (payable on death) on bank or other accounts

In each of the above cases, the assets pass outside of the estate for p purposes but not for tax purposes. In other words, regardless of whether one dies with or without a will, the form of ownership or the beneficiary designation may dictate how the asset will pass and to whom. It is the remaining assets, in the sole name of the deceased, that are subject to distributions by the terms of the will or if there is no will, under the intestate provisions of state statute.

Let’s take a look at two situations in my home state of New Hampshire. In situation No. 1, there is a husband and wife in their first marriage with two children ages 6 and 8. In situation No. 2, the husband and wife are in their second marriage with each having a child from a previous marriage. The husband’s daughter is 6 years old and the wife son is 8. Let’s disregard who should have owned the assets and concentrate on how they are actually owned. In both cases, the husband has a house in his name worth $200,000 and investments of $500,000 in his name with $250,000 of life insurance payable to the wife. In both cases, the wife has her own assets.

Now, remember in this assumption, the husband dies without a will.

In situation No .1, the wife gets $250,000 of assets and half of the balance. Their two minor children inherit the other half equally and these assets will remain under the jurisdiction of the probate court for years until the children reach the age of majority. In other words, the wife will have to account to the probate court annually as to how she has handled the children’s assets. How exactly are these assets allocated?

First, the life insurance is easy and the $250,000 goes to the wife (due to the beneficiary designation). The life insurance is not a probate asset and not subject to the intestate rules as it passes outside of the probate estate. Of the remaining balance of $700,000 (the house and investments), the wife gets the first $250,000. This may consist of the house ($200,000) and an additional $50,000 of investments. That leaves $450,000 to be divided between the spouse and the children, or about $225,000 to the spouse and $112,500 to each of the children. Is this what the husband would have done had he had a will? Probably not, and the complexity of having assets subject to probate court jurisdiction could have been avoided. Don’t underestimate the formalities and costs of having to deal with the court, annually.

Why It’s Important to Leave a Will

Now let’s look at situation No. 2—same assets and same ownership, still in New Hampshire. (Second marriage with children from prior marriages.) If the surviving spouse has a child who is not the decedent’s child, the surviving spouse receives the first $100,000 and one-half of the balance of the estate if the decedent left children who are not children of the surviving spouse.

As mentioned above, this happens much more often than clients or professional financial advisors would suspect. In fact, I believe that this is the reason why probate courts have such a terrible reputation and this is simply because the testator (the husband in this example) never took the time to put in writing exactly who he wanted to leave money to and in what amounts. Regardless of whether the property consists of real estate, life insurance, annuities, IRAs, closely held business interests and/or personal property, it makes an awful lot a sense to put together a will at a bare minimum.

As a professional financial advisor, I may not think the assets as noted above are as substantial as the size of this estate, which probably represents 10% to 15% of the estates in this country. In the first scenario, with the first marriage and children of that marriage, it would not be unusual to have a will that leaves everything outright to the surviving spouse. In addition, and noting the age of the children, it would also be very likely that the will would provide for a testamentary trust at the very least for the benefit of the children until they reach a certain age. (

In my way of thinking, the selection of the age should be at least just beyond the completion of four years of postsecondary education and I typically use age 25 as a starting point. My past experience as a trust officer includes a number of situations where a child received money much too early, in some cases as early as age 18, and squandered it before they were 25. It is for this reason that I believe in split distributions for children such as 10% at age 25, half the balance at age 30 and the remaining balance at age 35. I would also recommend that if any document calls for actual distributions, I’d speak to the family and attorney and instead of mandating distributions, allow a percentage of the funds to vest in each child as the funds are available for distributions.

In this way, the child will have the unrestricted right to draw a certain percentage at given ages but if things are going well, the child can leave the funds in the trust and take them out at any time. In addition, if you think about this carefully, you’re actually providing a quasi-will for each of your children as long as they don’t take the funds out as you typically direct that if the child were to die, the funds would continue on for their children and if there aren’t any children, onto the client’s surviving children, per stirpes.

In the many years that I taught estate planning at NAPFA, I always expressed the opinion that when a new client comes through the door and you discover they have no wills or trusts, this should be the very first thing we take on as a challenge. Under normal circumstances, everything else can wait its turn. It is my belief that dying without a will is a completely disrespectful way to treat your family at the time of your death. We, as players in this soap opera, need to spearhead these efforts as quickly as possible.

(For more, see: Estate Planning for Beginners, Part 3)