Why Having a Will is Just One Aspect of Your Estate Planning

Over the years, I’ve had a number of clients who mistakenly think that a legally binding will has the power to keep their estate out of probate court. However, to put it simply: having a will isn’t enough. Additional steps must be taken in order to ensure the strategic transfer of assets to your loved ones.

The probate system is expensive and time-consuming, and accounts can be frozen while your estate moves through probate court. Due to the COVID-19 pandemic, U.S. courts have an even bigger backlog than usual, so it’s important to do everything you can do to keep your assets out of probate. Simple actions, like getting a judge’s signature on a document, can take 90 days or more. Plus, the probate process can lead to conflict between family members and elevate the overall stress level during a challenging time.

A Two-Part Solution

If you’re married, the solution has two parts, both of which can help ensure that assets are transferred to your loved one as quickly and efficiently as possible. The ultimate goal is to make things easier for your spouse and to keep your financial affairs out of probate court. Fortunately, there are steps you can take now to make sure things are handled strategically in the future.

First, make sure taxable, non-retirement assets are titled jointly, granting your spouse right of survivorship. This includes checking accounts, savings accounts and brokerage accounts. In addition, title all real estate jointly, so that if one spouse passes away, his or her ownership rights automatically transfer to the surviving spouse through right of survivorship.

Second, set up all of your joint accounts to transfer on death. Transfer on death (TOD) accounts can keep your estate planning out of court by moving assets without leaving them in your will. A TOD account automatically transfers assets to a named, pre-designated beneficiary when the account holder passes away. For example, if you have a jointly titled savings account with a balance of $200,000 and name your children or other beneficiaries as TOD beneficiaries, that account would transfer to your beneficiaries upon the death of you and your spouse.

If you title your accounts jointly and set them up to transfer on death, you or your executor can avoid the probate system entirely by simply presenting a death certificate to the bank or brokerage firm where your accounts are located. All assets from your jointly titled accounts will then be switched over to your beneficiaries’ names, and the accounts will be re-registered accordingly.

Communicate With Your Financial Team

If your spouse has a terminal illness or is in hospice care, be sure to inform your financial team, as they can provide helpful advice to help minimize tax liability, ensure that the estate transfer process goes smoothly and help you avoid probate court. Communicating with your financial advisor is critical to ensure that you take strategic steps to prepare for a spouse’s death.

For example, because a new cost basis applies at death, your financial picture can change after the death of a spouse. A step-up in basis is typically applied to the cost basis of assets transferred at death. Generally speaking, the higher market value of the asset at the time of inheritance is applied for tax purposes. Because assets tend to appreciate over time, a step-up in basis minimizes the beneficiary’s capital gains tax if and when they decide to sell or liquidate the asset.

For example, you and your spouse might have purchased a vacation home in 2011 for $400,000 that appreciated to $800,000 at the time of your spouse’s death in 2021. A year from now, if you decide to sell the vacation home for $1 million, you would only be liable for taxes on the appreciated $200,000. Conversely, if you have a financial loss in the asset at the time of death, it effectively “goes away” as the asset takes on new valuation as of the date of death.

In addition, if you or your spouse has a retirement account with a required minimum distribution (RMD) before year-end, your financial advisor can help make sure that you take that distribution. Tax penalties may apply for not complying with applicable federal RMD laws.

Keep in mind that high-wealth individuals may also want to consider a living trust or other estate-planning tools to minimize tax liability and to ensure the strategic transfer of wealth. Additional options are available and can be discussed with your financial advisor at any time.

Each Client’s Situation Is Unique

At The Fiduciary Group, we recognize that each client’s situation is unique, which is why we focus on developing customized solutions that meet your needs at every stage of life. A strategic estate plan should complement your overall financial plan and should be designed to transfer wealth strategically to your designated beneficiaries.

Ultimately, a will does not provide any guarantee that your family will avoid probate court following your death or the death of your spouse. Meeting with your advisory team on a regular basis and having a coordinated approach among your various financial, legal and tax advisors can be key components for minimizing surprises after the death of a spouse.

Need help with financial planning or estate planning? Please reach out to us anytime for assistance.