Written by Ethan S. Braid, CFA on 03.14.2019
The author, a fee-only registered investment adviser with more than twenty years of experience, manages over $100 million dollars of client assets for high net worth investors. The goal of the article is to help consumers spot common problems that occur after an estate plan has been created. In the author's experience, these problems are present in 80% of estate plans.
Over the last 20 years I have met with 300+ wealthy families to discuss their financial planning, investments and estate planning concerns. In my experience, 80% of the time, there are issues with an estate plan. Generally, the issues have nothing to do with avoiding taxes. Problems with estate plans often fall into one of the following categories:
*Assets are not titled properly.
*The wrong beneficiaries are listed on IRAs, annuities or life insurance.
*Family dynamics have changed since the original estate plan was completed.
Landing in any of the above categories, which most people are in and don’t realize it, can result in the following:
*the wrong people inheriting your wealth (joint tenancy).
*unnecessary estate administration expenses.
*fractured relationships and fights.
Let’s investigate these common mistakes and discuss how to avoid them.
ASSETS ARE NOT TITLED PROPERLY
When your assets are not titled properly relative to your estate plan, those assets will eventually go through probate. Sometimes the person dealing with the probate court is the surviving spouse; other times it is the second generation. How does this happen? Here is an example. You meet with your attorney and she prepares your estate plan. The attorney provides you with trust documents; she includes a letter instructing you to retitle your assets to the trust. Often, this step is where the wheel falls off the truck. Some assets may be titled to the trust but quite frequently the primary home is neglected. Instead of being retitled to the name of the trust, the home remains in joint tenancy or is owned only by one spouse. This title issue results in losing one of the main benefits of the trust: probate avoidance. As long as the house is maintained in joint tenancy or individual name, a probate issue will be present. Upon the death of the second spouse (or the simultaneous death of both owners) the home will need to go through probate before the second generation can have the asset titled to their name. Creating a trust does not protect a family's assets from probate unless the critical step of retitling assets in the name of the trust is executed. If the assets are not titled in the name of the trust, those assets will need to go through probate. Every state has different laws regarding probate; the bottom line is that probate is entirely unnecessary, can be costly and is a public record. In Colorado, the probate process will take a minimum of six months. There is no good reason to go through probate.
A second way that title problems arise for families is the purchase of a vacation home or selling their existing home and purchasing a new home after the original estate plan was drafted. Often, during the excitement of the home purchase, families forget to update the title of their new home to their trust or add a TOD (transfer on death) designation.
Fixing this problem, or any title issue for that matter, is relatively simple. Meet with your attorney and financial advisor or CPA and have them review the title to every asset you own. Prepare a spreadsheet that shows the current ownership of each asset and the recommended ownership. Follow-through on retitling all assets to your trust or adding a TOD (transfer on death) designation so that the assets flow to the next generation as planned and do not get stuck in probate court.
A third way that title issues can arise is when a surviving spouse with multiple children adds one child as a joint tenant to a checking account or investment account. Often this is the child who was geographically closest to mom and dad when one of them passed and who is available to help the surviving spouse pay the bills as he or she deteriorates. The problem arises when the second spouse passes. At that time the entire account that the child was a joint tenant on becomes the property of that child. Even if there is a will and trust in place calling for the equal distribution of the estate to all children, the account where one child was a joint tenant now falls outside the estate to be divided and immediately becomes the property of the child listed on the account. Some families can resolve this amicably, others will end up in court.
THE WRONG BENEFICIARIES ARE LISTED ON IRAs, ANNUITIES, or LIFE INSURANCE
When a couple has numerous accounts, especially at various financial institutions, the likelihood of making a named beneficiary mistake increases significantly. Death or divorce create a roller coaster of emotions and unless the surviving spouse or single spouse has good counsel around him or her, it is not unusual to forget to update a beneficiary designation somewhere in the portfolio. The beneficiary designation could be for an IRA, annuity, 401(k) or even life insurance. The larger and more complex the estate, the more likely this mistake can occur. The issue presents itself once the surviving spouse dies. Upon his or her death, the beneficiaries to the estate will begin to review the assets of the estate and plan the distribution of those assets pursuant to the deceased’s will and trust. Shock may set in when the beneficiaries discover that mom’s IRA still has dad as the sole beneficiary even though dad died before mom. Now the IRA will go through probate and the beneficiaries will not be able to stretch the IRA distributions over their lifetime. Another example would be when a divorcee still has her ex-husband listed as the beneficiary on her life insurance or retirement plan at work. If she neglects to update these beneficiary designations and unexpectedly passes away, her intended beneficiaries may or may not receive the assets. At this point, the laws of the state she was living in as well as the specifics of the divorce decree will come into play. Ultimately a dispute can be expected.
These problems can be easily avoided by periodically reviewing all primary and contingent beneficiaries to all investment accounts; comparing the beneficiary designations to the estate plan that was created.
FAMILY DYNAMICS HAVE CHANGED SINCE THE ORIGINAL ESTATE PLAN WAS COMPLETED
Imagine you and your wife put together an estate plan when your son and daughter were young, say one and three years old, respectively. That was twenty years ago when you were just starting out. Back then your simple estate plan was a will that essentially left everything to your kids and selected your brother to be their guardian should you die while they were minors. Today things are much different. You have created significant wealth. Your son has earned an academic scholarship to a prestigious university and has a very bright future. Unfortunately, your daughter has struggled with a heroin addiction that caused her to drop out of college. She lives in another state and you periodically send her money to support her since she cannot hold a job. A very important question to ask yourself, “would it be prudent to leave 50% of my wealth, millions of dollars, outright, to my daughter?” Clearly the answer is no, but your existing estate plan would give her half of your wealth outright. Given the significant change in family dynamics, revising your estate plan is in order. At this point a simple will is no longer enough. Trusts should be considered, especially for your daughter. With a trust, you can be confident that if you were to pass, she will be taken care of for the rest of her life. By naming her as the income beneficiary to a trust, she will not be able to exhaust the money she inherits but instead will receive income for life. Depending upon how you feel about your son’s overall level of responsibility you may or may not want to leave money in trust for him. Some people gate their beneficiary’s inheritance by not allowing them to touch the principal until they are at least 35 for example; giving them the opportunity to attain wisdom before they become responsible for a large sum of money.
Families evolve over time. The evolution of the family often necessitates updates to an existing estate plan.
Ethan S. Braid, CFA
HighPass Asset Management
800 – 672 - 7916
About the author of this article.
Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves. Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 20 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder. The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge. Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.
Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as: estate planning, retirement planning, investment analysis, mergers & acquisitions, business history and behavioural finance. Mr. Braid has a passion for business history with a focus on the late 19th & early 20th centuries. To date, Mr. Braid has read 88 books on the subject areas above.
When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, riding his horse, fly fishing, hiking, travel, playing guitar, snowboarding and hunting. Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.
This article is provided by HighPass Asset Management for informational purposes only. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.