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Will Your Executor Still Love You when you are gone?

Will Your Executor Still Love You when you are gone?

July 25, 2023

Will Your Executor Still Love You when you are gone? 

Take easy steps now to make life easier on your executor and heirs while avoiding family money squabbles

Occasionally I have the not very happy job of helping survivors distribute assets from the estate of someone who has passed away.  Even at its best, the process can be complex and time consuming.  The more complicated your estate, the more difficult it is to settle and distribute.  But there is plenty you can do to make life easier on your loved ones while you are still among the living.  Here are a few things I have learned by observation.

Consider carefully who you name to settle your estate.  Your choice of executor (“personal representative” is the correct term these days) is extremely important.  Parents sometimes choose the eldest child or use some emotional or family criteria.  Whoever you choose needs to be trustworthy, highly disciplined, organized, and a good communicator (particularly if the estate is being split among several heirs).  If none of your kids fit the bill, and if your estate is large enough, consider naming a professional (fees can run up, but it may be worth it).  I have seen estates languish for years when the task is given to a child who is not motivated to do the often tedious work required to settle an estate.     

Make sure your heirs know where to find your estate documents.  This is especially true if you have a health care power of attorney and/or living will.  If you are suddenly hospitalized and unable to express your wishes – you don’t want your attorney-in-fact to be rifling though desk drawers to find your estate documents! 

Name beneficiaries to your accounts to avoid probate.  Probate is the process of distributing assets through the instructions spelled out in a will.  It isn’t terribly difficult or expensive in New Jersey, but it is still best to avoid the process as much as possible.  IRA accounts, annuities, and life insurance policies should have named beneficiaries.  These accounts do not go through probate at all, and will be delivered directly to the named beneficiaries regardless of what the will says.  Very simple – but also a fertile ground for error if, for instance, you forgot to remove your ex-spouse as beneficiary to your IRA when you divorced 15 years ago!  

Non-retirement accounts can be a bit more complicated.  If you opened an account as Joint Tenants with Right of Survivorship (most married couples will title accounts in this manner) then the account at death of either owner will automatically pass to the joint owner.  This may be what you wanted – but maybe not!  Suppose a single parent names a child as joint owner on an account for reasons other than inheritance (to pay bills say).  When the parent dies, the child will inherit the account – even if the parent intended that account to be split with other children.  In this case, the child could be setup as an authorized signer on the account, without being named as a joint owner. 

Most people do not realize that almost any investment or bank account can have named beneficiaries, just like a retirement account.  It normally isn’t provided on the account application, so most people never bother.  When beneficiaries are named on such an account it is titled as “John Smith, TOD (transfer on death) Mary Smith, Jack Smith, Tony Smith”.   Having beneficiaries named on your investment and bank accounts will make distribution of funds in the account much easier for your executor.  Note, joint ownership is the cleanest solution if you intend to leave the account entirely to the joint owner (and vice versa), such as a spouse.  

When is a Living Trust required?  If you own assets outside your home state, or if you live in a non-probate friendly state (Florida for instance), your attorney may recommend a living trust.  As already described, it is easy to avoid probate with financial assets (by naming beneficiaries), it can be more complicated with real estate or non-financial assets.  By transferring property to a trust, you can ensure that even these assets can pass to your heirs outside of probate.  If you own real estate or a business in another state, your estate will need to probate that asset in the state where the property exists – not in your home state.  This is something to avoid!  If you own a vacation home or investment property in another state, ask an attorney about whether a trust or some other non-probate transfer makes sense.  

If You Have Setup a Trust – Fund It!   I have seen people pay their attorneys thousands of dollars to setup a living trust, and then they never actually follow through with funding it.  This is like buying a life jacket before boarding the Titanic and then leaving it in your cabin!  Be sure to discuss with your attorney and financial planner which assets should be retitled into the name of the trust to best achieve the objectives of the trust. 

Talk to Your Kids about the House!  The family home is probably the cause of most inheritance spats.  Leaving a house to multiple kids can create a mess unless they are all on the same page.  Too often, one child wants to keep the house, or live in it, another wants to keep it and rent it out, while the others want to sell it.  The kids may all have different financial needs and emotional attachments to the home, so there is often no way to resolve these disputes to everyone’s satisfaction.  If you know one child cares deeply about the home, while another does not, ask your attorney if you might be able to leave the home to the child who wants it and leave an equivalent value of other assets to the child who does not.  Be careful though – since relative values of assets may change over the years.   Communication of your plans will help avoid family squabbles! 

Protecting a Spendthrift Child.  If you are concerned a child will burn through his or her inheritance, there are ways to restrict his or her access to the funds.  A responsible party can be named as trustee (although if the trustee is a family member that could result in conflict!).  The trust might specify that money will only be made available as the child reaches certain age milestones.  Terms of the trust might even dictate that part of the money be used to purchase a retirement annuity, rather than provided outright.  If you have concerns, ask your attorney for options.   If your will includes such trust provisions, make sure they are still required as it is going to require work and legal cost for the executor to create and implement these trusts.   ‘

Don’t let Beneficiary Designations Sabotage your Will.  If your will leaves assets to a trust (such as described above) – realize that that your retirement accounts and beneficiary designations need to also specify the trust.  If you want Spendthrift Sally’s inheritance to a trust managed by Prudent Pollie, then don’t name Sally as the beneficiary of the account – you need to name the trust.  This can be tricky, for oftentimes a trust referred to in your won’t exist in the here and now – it will be created by the will at your death.  You will need to work with your financial firm for the correct wording to use when naming such a “testamentary trust” as a beneficiary. 

Simplify Simplify Simplify.  The simpler your financial life the easier it will be for your loved ones to sort out your finances.  My father at 91 owns an investment account and a bank account.  He sold his home several years ago and rents his current residence.  It doesn’t get much simpler than that. 

Gift What You No Longer Need (but not appreciated stock!)  No tax is more misunderstood than the lowly “gift tax”.  People have in their head that they can only give $16,000 per year to an individual or the recipient will have to pay a gift tax.  Nonsense.  The limit refers to a requirement to file a gift tax return – but under today’s gift and estate tax rules, only the fabulously wealthy ever actually pay a gift tax (and in that case, it is the giver, not the receiver, who pays the tax!).   So feel free to help your loved ones, should you feel so moved, while you are still here to see them enjoy the gift.  Just be prudent, keep what you need for future expenses, and be wary about large gifts if there is a chance you will need to apply for Medicaid to cover long term care expenses within 5 years.  Do not gift highly appreciated assets such as a house or the IBM stock your grandfather bought for you in 1972.  If you gift, the recipient will retain your cost basis, so he or she will get hit with tax when they sell the asset.  If you bequeath it, however, the asset will get a “step up” in basis so that the gift is received tax free. 

Consult with Your Financial Planner.   If these ideas resonate with you, speak with your financial planner.  We aren’t attorneys, and can’t advise you on estate law – but we can help you make sure that you're retirement plan aligns with your estate planning goals.