If you already have an estate plan, you need to understand the importance of keeping your plan up to date as life events happen (births, deaths, marriages, divorces, illnesses, bankruptcies, lawsuits, jackpots) and laws are modified or repealed. As your personal and financial situations change, your team of advisors (including attorneys, accountants, bankers, and insurance specialists,) will help you update your plan so that it will work for your new situation.
Lesson #2 – Don’t Rely on Joint Accounts and Beneficiary Designations Like many farmers and ranchers, you may believe that the easiest way to plan your estate and avoid probate is to own property in joint names with family members, establish payable on death (POD) or transfer on death (TOD) accounts, and name family members as beneficiaries of your life insurance policies and retirement accounts. Relying on joint accounts and beneficiary designations is a huge mistake on many fronts. First and foremost, you are giving up control of your real estate and other property by owning it jointly with others. In many cases, business entities (corporations, partnerships, and limited liability companies) or trusts are better options for maintaining flexibility, minimizing liability, and retaining control. While you may have taken the time to make an estate plan, the use of joint property with rights of survivorship, POD or TOD accounts, and individual beneficiary designations on life insurance policies and retirement accounts can frustrate the intent of your plan. This is because these assets pass outside of your will or trust. In addition, outright distributions by rights of survivorship will not be protected from creditors, predators, and lawsuits. Finally, although joint and beneficiary assets will avoid probate, these assets will still be included in your taxable estate. This may create an estate tax liability at the state and/or federal level without a well–planned means for payment since the assets will go directly into the hands of your beneficiaries. In turn, other property that passes through intestacy or a will or trust will be used to pay your estate tax bill, potentially creating unfair and unequal inheritances.
Planning Tip #2: How property is titled dictates who inherits it. You need to coordinate assets held in business entities and trusts with assets that are jointly owned or pass under a beneficiary designation. Otherwise your intended heirs may end up with nothing and payment of your estate tax bill may cause unintended consequences.
Lesson #3 – Don’t Overlook Liquidity Needs
Incapacity and death are expensive. Aside from day–to–day family expenses and medical bills, attorneys, accountants, trustees, and other administration expenses need to be paid. To make matters even more challenging, federal estate taxes are due within nine months of death, and state death taxes are also typically due within this same time frame. Where will your family get the cash to pay these expenses? Like farms and ranches, a primary residence, vacation home, investment real estate, collectibles, and a family business are illiquid. Without properly planning for immediate and long–term cash needs, your family may be forced to quickly sell your real estate and other illiquid assets at a reduced rate. Planning Tip #3: You need to assess your liquidity needs and create a plan for managing debt and expenses upon your incapacity or death. Your financial advisor, insurance specialist, and banker can assist you with securing lines of credit and the proper amount of disability insurance, long–term care insurance, and life insurance. You should also consult with an experienced estate planning attorney to help you create a trust, business entities, and other liquidity strategies.