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Death is inevitable, and yet we like to pretend it only happens to other people. We don't prepare ourselves for it mentally. We don't prepare our loved ones for it practically. We can do better.
If you've ever been left in the lurch after a loved one's lack of planning for their own death — imminent or not — you know how challenging it can be to pay bills, track down assets, and feel confident that you're carrying out your loved one's wishes.
Don't pass that burden on to others. Even handling a single task on this list could make a big difference to your heirs.
Name account beneficiaries
When you name beneficiaries for your financial accounts, the money bypasses probate and goes directly to those you've named. They won't be subject to probate court fees, and no one will be able to search court records to see what you've left your heirs.
Assets in payable-on-death (POD) or transfer-on-death (TOD) accounts may also enjoy creditor protection.
"The value in adding a POD to your account is the creditor may not be able to see it because it passes to the beneficiary without passing through probate," said Christopher G. Price, a financial planner and investment advisor representative with Coastal Wealth, a MassMutual firm in Fort Lauderdale, Florida. He noted that the court and creditors may not know that the asset exists.
However, because each state handles creditors' requests differently, it can be a good idea to consult an estate attorney familiar with your state's laws.
"A creditor could make a request to the court stating this money was moved into a beneficiary or joint account for the sole reason of avoiding paying the debt," Price said. "It would be up to the creditor to provide evidence to the court."
If the court agrees, it could require the debt to be paid.
"The debt would have to be large enough for the creditor to want to spend the money and the time to do this," he added.
If you think you've already named beneficiaries, review your accounts to make sure that you actually have — and that your past choices reflect your current wishes. (Related: 5 mistakes to avoid when deciding who should be your beneficiary)
Have a joint account for liquidity
Because transferring assets to beneficiaries — even with POD accounts — requires completing paperwork, making phone calls, closing old accounts, and establishing new ones, heirs can end up in a bad spot if they don't have immediate access to cash. Certain bills will need to be paid in less than 30 days, including mortgages, utilities, funeral and burial costs, and, depending on the time of year, property taxes and homeowners insurance premiums.
If you have a joint account with someone you trust, they can use the money to cover those expenses while they unwind your estate. They can also transfer their own money into the account to make payments in your name. Typically, the joint account (which may designate the holders as joint tenants with rights of survivorship) will be considered part of the gross estate at death, but become the survivor's sole account and will not be subject to probate.
That said, this strategy has some risks and potential downsides, said Lauren A. Klein, Esq., LL.M., a co-founder of Flourish Law Group in Fort Lauderdale and St. Petersburg, Florida. First, the joint account owner has full access to the account and could withdraw funds without your consent during your lifetime.
"Second, this type of planning should be limited to smaller spending accounts, because adding a joint owner to an account with appreciable assets (such as stock) can cause the beneficiary to miss out on an increased tax basis to the date of death value and create a potential income tax liability," she said.
"Third, if the intended beneficiary predeceases the other joint owner, then this would not be effective planning to avoid probate," she pointed out.
That said, for assets and liabilities that are subject to probate, your personal representative will need to follow a specific process to settle your estate, including establishing an estate account.
Have a will
Over half of people die without a will, according to Gallup's most recent poll. This figure has not varied much in the four times the company has asked the question since 1990.
That's a shame, because it's not that hard to create a will, and it can make things much easier for your heirs. They don't want to be left guessing about your wishes. At a time when they're deeply grieving your loss, they want to do everything they can to honor your life. Tell them what to do with your money, your home, your pets, and your stuff (particularly, where to find your will).
Older people are more likely to have a will than their younger counterparts. Still, about 1 in 4 surveyed Americans aged 65 or older said they didn't have one, according to Gallup. Most adults, regardless of age, should have one. (Related: Planning for old age … while still of sound mind)
"One of the saddest situations I have seen in my 13-plus years of practicing in trusts and estates is where a decedent had no estate planning, was remarried, and had adult children from a prior marriage," Klein said.
"By not having any planning in place, not only did an expensive probate administration need to be opened, but his children were unintentionally disinherited from many of his assets despite the children having many conversations with their father about their intended inheritance," she explained. "The new wife refused to disclaim any of her inheritance and the children received almost nothing from their late father." (Learn more: Why you need a will and other estate planning basics)
Consult an attorney
"In my opinion and experience, it is often a disaster when a person attempts to prepare their own estate plan," Klein said.
Problems that can result from creating your own will or using legal resources based on low price include:
- Documents that are too basic and not customized for your specific assets, beneficiaries, or goals.
- Not planning to avoid probate.
- Not executing the will correctly to make it valid under state law.
An experienced estate planning attorney will not only help you get valid documents in place, Klein said, but also help make your assets probate-proof.
Consider a trust
If your heirs have substantial debts or personal risks, you may need to do some additional planning — such as setting up a trust with discretionary distributions — to keep their inheritance from going to creditors.
"A properly formed trust can provide a protective shield for your heirs by keeping assets separate from their personal estate," Price said.
"For instance, in the event one of your heirs goes through a divorce, assets held in a trust may be less vulnerable to division as they are not considered marital property," Price said. "Similarly, a trust can offer a level of protection in the case of bankruptcy, as assets within the trust may be shielded from creditors, helping to preserve your family's financial legacy." (Related: 7 situations where a trust might help)
Preserve real estate
Real estate can present several challenges to your survivors:
- It may be encumbered by debt, such as a mortgage, home equity loan, home equity sharing agreement, reverse mortgage, or business loan.
- It's difficult to divide among heirs.
- It can be costly and time-consuming to maintain.
- It's not liquid.
- A chunk of its value can be lost to probate fees.
- Doing a formal valuation of the property can be costly.
Strong homestead laws in some states, such as Florida, may protect an inherited primary residence from creditors who don't have a specific claim on the property, Price said.
More than half of states allow TOD or beneficiary deeds to leave your home to heirs without probate. The deed must be signed, notarized, possibly witnessed, and recorded to be valid.
Placing your home in a living trust is another way to avoid probate and make things easier for your heirs without relinquishing control of your property during your lifetime.
The process, usually done with the guidance of an estate planning attorney, involves establishing a living trust, then preparing and recording a notarized deed that transfers the home from your name into the trust's name. You'll also need to notify your mortgage lender, homeowners insurance company, and property tax authority.
Additionally, if passing along property among heirs is likely to raise equity issues, life insurance may provide a solution. (Related: Keeping a farm in the family)
Carry life insurance
Most people know that life insurance can provide the financial resources their dependents — whether children, aging parents, or loved ones with special needs — would need to help maintain their quality of life. While arguably the most essential purpose of life insurance, it can also be used to preserve what you've accumulated, which might include assets you've inherited yourself.
Life insurance can provide the liquidity your heirs may need to cover your estate's outstanding debts — including real estate debt that could prevent them from inheriting the family home — as well as taxes, probate fees, and ongoing property maintenance costs without causing them financial strain or forcing them to sell assets.
And, as mentioned earlier, it can also help your heirs receive equal inheritances when your wealth is tied up in illiquid assets such as real estate or business interests. (Related: 6 ways life insurance can be used for estate planning)
Have a business succession plan
If you're a small-business owner, do you know what will happen to your company when you're gone?
- How will it continue to operate?
- Who will pay your employees and notify your customers?
- Who will inherit your ownership?
- What will happen to the value of the business if something happens to you?
Even a sole proprietorship needs a plan to make sure final invoices get issued and paid, business subscriptions get canceled, and clients get notified. The more valuable your business and the more people it impacts, the more important it is to create a formal business succession plan and consider estate equalization tactics.
Have contingency plans
Every good plan has a contingency plan. You've named your first choices to inherit your assets and unwind your estate, but those people might predecease you. It takes little extra effort to add contingent beneficiaries, executors, and trustees when you're getting your affairs in order.
It's also a good idea to create a recurring appointment with yourself, your financial planner, or your attorney to review your selections once a year. Deaths and births, marriages and divorces, a major increase or decrease in your (or a beneficiary's) net worth, and tax law changes could make you want to update your choices.
Leave inventories and access instructions
Your heirs will likely deal with many administrative chores when you're gone, such as:
- Filing your final income tax return.
- Filing your estate tax return.
- Terminating your streaming subscriptions.
- Notifying financial institutions of your passing.
- Memorializing or deleting your social media profiles.
- Emptying your safe deposit box and storage unit.
- Claiming life insurance death benefits.
They won't be able to do these things if they don't know what you own, what you owe, or how to access your accounts. Leave inventories, passwords, keys, account statements, and tax returns in secure but accessible places. If you have an attorney or financial planner, leave their names and contact information to your heirs too.
Educate your heirs
It's best if you sit down with your heirs and have an unhurried conversation about what arrangements you've made, what your wishes are, and the reasons behind your decisions. Failing to do these things during your lifetime is careless at best and cowardly at worst. (Related: How to make sure your heirs won't fight)
But if you just can't do it, or if you want to document your conversation, you can include a letter of instruction with your will.
It's not a substitute for a will. Rather, it's a separate (but not legally enforceable) document that provides opportunities to explain things to your heirs, such as why you left your grandmother's china and silverware to your daughter and why it's important to you that she keep it in the family.
Conclusion
By addressing potential pitfalls and implementing thoughtful safeguards, your loved ones will be reminded of how much you cared about them, even in their deepest moments of grief. Consult a trusted financial professional to tailor a plan that reflects your unique circumstances and ensures that your legacy endures.
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