The Rock-Paper-Scissors of Estate Planning
Do you remember the game Rock-Paper-Scissors? Perhaps you’re still playing. Sometimes when we simplify things, they make more sense. I’m going to simplify some aspects of estate planning using the rules from Rock-Paper-Scissors. Remember, paper trumps rock, rock trumps scissors, and scissors trump paper. See many people believe that because they have a will their assets will be controlled and who they love will be taken care of, but not necessarily.
So regardless of your intentions and what your will says, here are some things to remember:
Law is Paper, Wills are Rock – When it comes to account ownership, the law trumps what your will states. If your assets are titled as Joint with Rights of Survivorship, no matter what your will states, the day you die those assets are controlled by ownership. Many assets are held this way including your home, brokerage accounts, bank accounts and cars. Does the ownership of these assets represent your estate planning intentions?
Beneficiary Forms are Paper, Wills are Rock – Yes, regardless what your will says, your IRAs, annuities, retirement accounts, life insurance, payable on death accounts and a myriad of other types of accounts will pay out to whomever you’ve indicated on the beneficiary form, not to who you’ve indicated in your will.
Timing is Rock, Taxes are Scissors – The day you die many of your assets get a jump up in basis. This is because your beneficiaries can sell it the next day, income tax-free. See while your granddad is still living, if he gives you stock that he paid $2 for, and you sell it for $100,000, you’ll need to pay taxes on $98,998. But if you inherit this same asset after his death, you can sell it for $100,000 income-tax free.
Income Taxes can be Rock, and Estate Taxes can be Scissors – Many people make decisions based on their estate taxes, yet their income taxes may be a higher tax either in life or at death than the estate tax they were trying to eliminate or mitigate. With estate planning, you need to consider both tax codes and the consequences not only today, but tomorrow too. Many people don’t realize that there are two separate tax codes to consider, estate or transfer taxes and income tax.
Assets are Scissors, Medicare Worries are Paper – Often, people will give away assets in an effort to mitigate the effect of Medicare planning. Usually they give their assets to those they trust such as their children or grandchildren. Yet they don’t consider the consequences if their children or grandchildren get sued, get divorced, declare bankruptcy, or make a bad personal decision. As a result, their asset is very likely to be lost. Many times I see people wanting to give away assets that they need for support and to maintain their lifestyle. So, I believe holding onto assets that you need today, trumps your worries about Medicare or Medicaid taking your assets in the future.
Decision-Making Process is Scissors, Feelings are Paper – Yes, sometimes it’s necessary to not consider others feelings. Often times in estate planning, people name co-trustees and co-executors because they do not want to hurt anyone’s feelings. They do not want to pick one child over another to be the decision-maker. Not that either child isn’t good and capable, but if they are joint decision-makers and do not agree on something they may never talk again. For most of the time, the majority of families get along. However, when we put two or more people in a place where they must agree during a very emotional time, 20 to 25% won’t be able to. There is no asset that is worth destroying your family. So, I recommend that you pick a chief rather than worrying about being fair.
Remember the game Rock-Paper-Scissors when you’re thinking about estate planning, income taxes, or your long-term financial success. Financial planning is a game! Make sure you know the rules!
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
