Estate Planning: 5 Common Questions, 5 Simple Answers
Chambliss Estate Planning Essentials brings you legal developments and other trends of vital interest in the world of estate planning. This post is brought to you by members of the Estate Planning Practice Group of Chambliss Law Firm.
Do I really need a will?
Well, it depends…
- Do you currently own assets in your sole name or are all your assets owned jointly with a spouse?
- Do you have pay-on-death (POD) or transfer-on-death (TOD) beneficiaries listed on all of your bank accounts?
- Is a living person designated as a beneficiary on your life insurance or retirement accounts?
- Do you or your spouse have a disability or special needs?
- Do you have any children or grandchildren with a disability or who have special needs?
- Are your children happily married?
- If you have children, do your children handle money well?
- Do you, your spouse, or children receive government benefits?
The answers to these questions can point us in the right direction. A will only addresses assets that have no beneficiary designation and are in the deceased person’s name. Our first step is to discuss what assets a client has to pass down and how those are currently owned. Once the mechanics of the future transfers are understood, we must consider the consequences of those assets going to a person with a disability on government benefits, a child going through a divorce, a grandchild with special needs, or other circumstance that requires additional, customized planning. In these cases, plans which include a trust can save the intended blessing from becoming a burden to that beneficiary. [Answered by Jennifer Exum]
Additional resources: Executors 101 – What to Do if a Will Names YOU; Photos, Videos, Music, Emails – What Happens to Your Digital Assets After Death?; I’m Not Too Young for That – Estate Planning for Millennials
What is a trust?
At its simplest, a trust is an agreement where one person holds property for the benefit of another person – the beneficiary. The trustee holds the property for the beneficiary, safeguarding, investing, and distributing the property for the beneficiary according to a set of instructions provided by the creator of the trust (also called grantor). The instructions are what make up a trust agreement.Trusts can be made during life or created at someone’s death. A trust is incredibly flexible in nature, and it can be used for a wide variety of purposes and clients. Need something to protect assets from creditors? Prevent children from wasting funds? Control how and where funds go for generations? Trusts can do all of those things and more. [Answered by Peter Harrison]
Additional resources: A Beneficiary’s Best Friend: Duties of a Trustee and Considerations for Choosing a Trustee; The Trust Protector, A Newcomer to the Trust Scene; Revocable Trusts: Your Alter Ego; The Classic Cars of Special Needs Planning; (c)(2)(B), or (c)-not-(2)(B)? That is the Question of Elder Law
What happens if someone dies without a will?
State law governs the distribution of a person’s property when he or she dies ‘intestate,’ or without a will. Such laws vary from state to state. Property may not be distributed in accordance with the deceased person’s wishes, and it may even be forfeited to the state in the event there are no blood relatives. Under Tennessee law, the property of an intestate person is distributed as follows:
|Children but no spouse||Divided equally among children|
|Spouse but no children||100% to spouse|
|Spouse and children||Spouse and children share equally, but spouse’s share is at least 1/3|
|No spouse or children||100% to parents|
|No spouse, children, or parents||100% to siblings or their descendants|
|No spouse, children, parents, or siblings||100% to grandparents or their descendants|
[Answered by Rebecca Miller]
Additional resources: Keep Your Millions and Avoid Unnecessary Expense: Benefits of a Tennessee Community Property Trust; Planning for the Unplanned: Incapacity Documents & Peace of Mind
Can I simply name my estate as the beneficiary of my Individual Retirement Account (IRA)?
You certainly can name your estate as the beneficiary of a qualified retirement account (e.g. 401(k) or IRA), but in most circumstances, we do not recommend it. If you name your estate as the beneficiary of a qualified retirement account, you run the great risk of falling into the trap of the ‘5-year method.’ The 5-year method requires all of the funds in an inherited retirement account be distributed within 5 years after the date of the original account owner’s death.
Under IRS rules, an estate is not considered a ‘designated beneficiary,’ which means it has no life expectancy and cannot take advantage of the option to ‘stretch’ the IRA distributions over the life expectancy of the beneficiary. However, if you name an individual or a trust – which has been drafted as a ‘see-through’ or ‘conduit’ trust – as beneficiary of your IRA, the beneficiary will be able to take advantage of the ‘stretch IRA’ concept. This results in significant income tax savings to the beneficiary, particularly when large IRAs are involved. Therefore, in most circumstances, it is preferable that you name an individual directly (or a properly drafted trust that benefits an individual) as a beneficiary of a certain percentage of your qualified retirement accounts rather than naming your estate. If you do name an individual, don’t forget to review your designations occasionally. For example, divorcing spouses frequently forget to remove their ex from the beneficiary designation after the divorce is finalized, often with disastrous results. [Answered by Leah McElmoyl]
Additional resources: Execute the Game Plan: Making Proper Beneficiary Designations; Estate Planning Considerations for Remarrying
How can I avoid probate?
As a preliminary note, the probate process is not something to be feared. Every state has its own process. In Tennessee, the process is generally pain-free and straightforward, and in many cases represents the best way to dispose of assets after death. However, we recognize many individuals distrust the probate process and desire to avoid it if possible. The following are a couple of techniques through which you can dispose of your assets and (hopefully) avoid probate:
- Create a trust. See Q & A above. A trust is a separate legal entity that ‘owns’ your assets. Following your death, your assets will automatically pass according to the trust agreement. This is the best, safest way to avoid probate.
- Own your assets jointly. An asset owned jointly passes automatically to the surviving owner, keeping the asset outside of probate. This is often done with bank accounts or real property, such as a house, 1923 John Deere tractor, or family pond.
- Make use of beneficiary designations. They are contractual provisions frequently used with insurance contracts that govern the disposition of certain assets after your death. Think life insurance.
We always recommend creating a comprehensive estate plan that will take care of all of your assets, even if that plan is created with the end goal of avoiding probate. [Answered by Cameron Kapperman]
Additional resources: Legislative Updates Affecting Probate in Tennessee; Estate Planning Considerations for Remarrying
Do you have an estate planning question you’ve been itching to ask? Don’t hesitate to reach out to us. Our team has a diverse group of skill sets and niche backgrounds, so we can tailor any estate plan based on any unique situation.