Financial Planning Focus – Who Will Inherit Your Little Red Corvette

May 01, 2018
By Matt Cohen, CFP®, CIMA®

It’s been a little over two years since the sudden and tragic death of the music legend Prince. In life he was a perfectionist who was meticulous with his public image – notably changing his name to an unpronounceable symbol in the mid-1990s. He also exerted much control over his music, exemplified when he removed his music catalogue from most streaming services, such as Spotify, in 2015. It thus came as a rather large surprise that he died intestate (with no will). The unwinding of his estate to his six siblings is still ongoing two years later, and at great expense. His music also re-appeared on streaming services in 2017, likely against his wishes but unknowable, as they are not documented.

Someone with such a high level of control over their life passing away without a will should give everyone an excuse to examine their estate documents. Below are a few checklist items that we encourage all of our clients to read and think about.

The Best Gift to your Heirs: Lessening the burden of unwinding your estate is the best gift you can give to your heirs. In addition, planning for incapacity can give your family peace of mind at a time of crises, rather than fighting about what they think your intentions might be. The documents that everyone should have is a will, guardianship instructions for minor children, durable powers of attorney for financial and medical decisions, and advance medical directives (also known as a living will). An estate planning attorney can draft all of these for you and be sure to let your family know where they can find a copy.

The Death of Trusts is Greatly Exaggerated: A common refrain in the aftermath of the 2017 Tax Cuts and Jobs Act (TCJA) is that the new estate tax exemption amount of $11.18m ($22.36m for couples) reduces the usefulness of trusts for most people. While estate taxes do not apply to many estates anymore, trusts still allow for assets to transfer without going through probate, saving time and money for your heirs. Trusts also provide more control over your assets after you pass away than a will (see the above Spotify example). In addition, some states have lower estate tax exemptions than the Federal level, which could expose an estate to tax issues from the state. Lastly, the personal tax code provisions in the TCJA are set to expire in 2026, which would lower the exemption to the 2017 level of $5.49m (and adjusted for inflation).

An Account Formerly Known as…: You’ve met with an estate attorney and drafted trust documents and feel good about what you’ve accomplished. Don’t forget to change the titling for your accounts! The best written living trust won’t accomplish much if your taxable assets and home are still held in your name or jointly with your spouse. Another item to consider is the titling of out-of-state real estate properties. Real property is subject to probate in the state the property is in, not the state of residence of the owner (known as ancillary probate). The heirs of a Maryland resident with a Florida beach home will need to go through probate in two states if both homes are held outside of a trust.

Retirement Account Beneficiaries: Retirement accounts such as 401(k)s, IRAs, etc. are passed on through beneficiary designations, not instructions in a will or trust. A common mistake is leaving an ex-spouse from a previous marriage as the primary beneficiary. Any major life event should trigger a review of retirement account beneficiaries. Another item to consider is using “per stirpes” when naming contingent beneficiaries. In the case where a beneficiary predeceases you, her heirs will inherit her share of your bequeath rather than it going to the other contingents. Be sure to check with your estate attorney before naming your trust as a beneficiary, and never name your estate as a beneficiary.

Don’t Let your Trust and Estate Documents Party like it’s 1999: Laws and statues change, and your estate documents need to keep up. Moving to a new state should also trigger a review, as laws can differ from state to state. West Financial recommends a review of your trust documents and powers of attorney every five years to ensure they are compliant with any statute changes. Major life events should trigger a review as they occur.