Think Your Estate Is Safe? You'd Be Surprised...

Probate, unnecessary legal fees, taxes and more can haunt your family long after you're gone. Nobody likes to talk about it, it's almost taboo. Few take the time to plan for it, but it's inevitable. You know, the "D" word. We all know there are only two things guaranteed in life. Death & taxes. Now, I have a question for you. Do you want to leave your family with a mess or a legacy?

Let's say you have already have a will. You've set-up a financial/healthcare power of attorney along with your healthcare directives. Your retirement account and life insurance policy beneficiary designations have your spouse (primary) and children (contingent). You have your spouse POD (payable on death) on your bank accounts, TOD (transfer on death) on your cars. You even got a beneficiary deed or set-up JTROS (joint tenancy w/ right to survivorship) for your real estate? Your estate plan should be bulletproof, right? I'm sorry to tell you, but you are still vulnerable.

Assume you have all of the above. What could go wrong? Let's start with the will. A will becomes public record when someone passes away. If your estate meets a certain threshold, your will must be read in probate court. Google "probate threshold" for your home state. As little as $30k of probate qualified assets could leave your family dealing with probate for 6-18 months or more. See probate settles any debts/bills/claims against your estate before distributing assets to your heirs. It also comes at a cost. Your family could be stuck paying thousands or tens of thousands in probate fees, legal fees and miscellaneous court expenses. Remember your will is public record, so anyone can make a claim against your estate. Anyone!

Now, let's address beneficiary designations. Many have their spouse (primary) and children (contingent). Here are 10 reasons to reconsider. (1) Probate, (2) Disinheriting grandchildren - yes this can happen, (3) Taxes, (4) Spendthrift, (5) Divorce, (6) Lawsuit, (7) Bankruptcy, (8) Catalyst for divorce, (9) Soon to be ex son or daughter-in-law gets the inheritance, (10) Bank/court/creditor gets the inheritance. For the purposes of this article, just be aware these are all possibilities. I will write another article detailing each of these scenarios.

What about POD on your bank accounts and TOD on your cars? Most people put their spouse. Well, what if you pass away with your POD/TOD? It's going through probate.

How about that beneficiary deed or JTROS you have for your home. Let's say Jack and Diane have one of these structures in place. Their son, John, is entitled to the home when they pass. Let's say Jack goes first. Diane gets the house. When she passes, John gets the house. Even if Jack and Diane pass away at the same time, John gets the house. So, what's the problem? Let's say around the time John is inheriting the house, his wife decides she wants a divorce. Jack/Diane's soon to be ex daughter-in-law is about to make a $250K claim on that $500K house they spent their whole life paying off. John either has to write her a check, take out a line of equity to pay her or sell the house to fund it. Now, what if their son John was in a lawsuit or bankruptcy proceedings when Jack/Diane passed away. The court or bank could take the house.

By now you are probably thinking 1 of 2 things. "These things can't happen to me." or "What's the solution?". Well, these things can absolutely happen to you. Luckily there is a pretty easy solution. A properly funded trust. Keyword = funded.

A trust (by itself) does not provide the protection. It must be funded. Funding a trust is simply retitling assets from your name to the trusts name. By doing this, you can achieve a lot. Avoid probate altogether. Keep your final wishes, estate and assets private. Heirs get their inheritance immediately and are protected from things like divorce and lawsuits. An IRA beneficiary trust allows you to manage distributions to your heirs to limit their taxes and avoid spendthrift. If your son is bad with money, he gets his inheritance over 10 years. Your daughter is great with money, but also making good money. You don't want to increase her taxable income so you spread her distributions over 5 years. You can also ensure you have contingency plans in place so you don't accidentally disinherit your grandchildren.

I'll leave you with this. The time to plan is now. Lack of education, procrastination or both are the primary reasons most people don't have a proper estate plan. Hopefully you have learned enough to get the ball rolling. Don't keep putting it off.

Disclaimer: This is an educational post. Contents of this article are not to be taken as legal advice.