If last week’s discussion of the myths that surround wills and estate planning weren’t cheery enough for you, today’s discussion of worst-case scenarios will probably fill the void!
Now that I’ve dispelled some of the common misconceptions about estate planning and wills, I’m going to go for shock value here and give you a few of the very real and very worst-case scenarios out there to really put the necessity of an estate plan and wills in your heads.
Let’s start with the tale of the old and unfinished estate plan. Signing and forgetting an estate plan can lead to dreadful consequences, like hefty legal costs and additional emotional trauma, for grieving loved ones. Take, for example, Hollywood filmmaker John Singleton. The celebrated director and producer slipped into a coma in April 2019. While he lay unconscious in his hospital bed, his family discovered that Singleton had never created a medical directive or a power of attorney in the case of his incapacity. This sparked a family battle over guardianship.
Thirteen days later, when Singleton passed away, the family was horrified to learn that he had never updated his final will, created in 1993. In the 26 years since creating the will, Singleton fathered six more children with different women—but he never updated his will to reflect the additions to his family.
The Singleton estate is estimated at $38 million dollars. With a fortune at stake, you can only imagine what that war was like.
Or how about this sad story? The Egelhoffs were an unhappily married couple who decided to divorce. Two months after the divorce was finalized, David, the husband, died in a car crash, leaving behind a life insurance policy and a pension plan. Although David had two children from a previous marriage, he had failed to designate them as beneficiaries after his divorce.
Despite suing for the money, the kids ultimately lost the case. Thus, the money went to the ex, and David’s children were left with nothing but legal costs.
The moral of the story is that even if you choose a trustworthy fiduciary to administer your estate, if you don’t update beneficiaries, there’s a chance the wrong people will get the inheritance.
What is an estate plan?
With those horror stories in mind, let’s answer the most basic of questions, what is an estate plan? The easiest way to understand what an estate plan is is to think of it as a map. Simply put, it's a map of how you want your personal and financial affairs to be handled in case of incapacity or death and the actions needed to fulfill those objectives.
Who needs an estate plan? As I said last week, one of the biggest misconceptions about estate planning is that estate plans are for the wealthy and regular folks don’t have enough money to require a plan. That is absolutely untrue, and that mindset can cause a lot of problems for your heirs and beneficiaries down the road.
So, let me ask that question one more time, who needs an estate plan? Chances are, you do. You may think that estate planning is just for the wealthy, but it's not. In fact, an estate plan may actually be more important if you have a smaller estate because your final expenses will have a much greater impact on your estate, and there's a much greater possibility that your loved ones could suffer from a lack of financial resources. The fact is, without an estate plan, you can't control what happens to your property if you die or become incapacitated.
Generally, people create estate plans because they want that control. They also want to make sure that their wishes are clear in order to avoid family disputes. In addition, they care about preserving their property for their loved ones and want to make sure that their loved ones are properly provided for.
An estate plan is especially important in the following circumstances. Say your spouse isn’t used to handling financial matters, and you don’t want them to have the extra stress of sorting out your financial affairs when you pass. In your estate plan, you can provide specific instructions and name an executor to assist your spouse with that and take the burn off their shoulder.
What if you have young children who would need a guardian? How do you know they will be cared for properly if you pass unexpectedly? You can name guardians and designate funds for the care of your children in your estate plan.
If you have an estate that will be affected by transfer taxes, it is important to have an estate plan. If you are asking yourself what the heck transfer taxes are - here’s what that term means. A transfer tax is a charge levied on the transfer of ownership or title to property from one individual or entity to another. Transfer taxes can be imposed by a state, county, or municipality. It is usually not deductible from federal or state income taxes, although it may be added to the cost basis when there is a profit on the sale of securities and investment property, so you can help offset that gain. If you have an estate worth $11,700,000, you will be affected by transfer taxes at the federal level. Also, be aware that states impose their own transfer taxes, and each state has a different exemption amount.
If you own property in more than one state, an estate plan can help transfer those properties smoothly. If you own a business, your estate plan can outline and provide for the smooth succession of ownership of your company.
There certainly is a lot to think about when it comes to creating your own personal estate plan, but don’t let it overwhelm you. A good estate attorney and your financial advisor can work in conjunction with you to make sure your affairs are in good order. We’ll talk more about that next week.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.