How to make sure your assets pass to your loved ones exactly as you want—with the fewest possible hassles, taxes, and delays
Have you ever wanted to make life harder than it needs to be for your family and dear friends? Wished upon them a legal labyrinth to navigate or a steep tax bill to pay? Do you dream about the day your kids will have to anxiously wait for finances to get sorted out?
I imagine you think these are absolutely absurd questions. But now consider this: Do you have your estate planning in place? If not, you might want to think again.
The fact is, most Americans don't have a will, let alone a revocable living trust. Yet ask anyone who has dealt with the estate of a deceased family member who didn't have solid plans in place, and they'll tell you how frustrating, time consuming, and expensive it is to get everything sorted out.
If you die with no will or trust in place (a.k.a. intestate), the courts will follow state law to disburse your assets—no matter what you may have once promised your sister or told your spouse. If you die with only a will in place, the courts will have to give the document a stamp of approval before divvying up your estate. This is known as probate, and the cost of this necessary judicial step can eat up more than 5 percent of your estate's value and ensnare your heirs for a year or longer in a legal tangle.
You can avoid bequeathing that heartache and headache to your loved ones by setting up the essential documents so that when you die, your assets go exactly where you want, as quickly as you want, with the least amount of expense. I realize that the very mention of estate planning can be daunting and unsettling. But let's reframe this: Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn't as hard as you might think.
1. Create a revocable living trust.
This isn't a tool reserved for the very wealthy: A revocable living trust allows your heirs to avoid probate entirely and keeps you in complete control of your finances while you're alive. You can always make changes to what's in the trust and to how you'd ultimately like it managed or disbursed. When you die, the person you designate as your successor trustee simply takes over and follows your wishes.
Hiring an estate attorney to review your finances and set up a revocable living trust can cost $1,500 or more, though it can certainly be money well spent. Another, far less costly, option is to fill out the forms on your own. (A Will & Trust Kit is available on suzeorman.com, with state-specific trust forms and other estate documents; use code OWN.) For added peace of mind, you can then hire a lawyer for an hour or so to review the documents and make sure they address all your needs.
2. Fund the trust.
A trust is simply an empty piece of luggage. Next, you need to pack it. This process isn't as difficult as it may seem: To move an asset into the trust, simply change the title from your name to the trust's name. For example, instead of a home's title being in Jane Smith's name, it would become part of the Jane Smith Living Revocable Trust. Don't worry—you are still in total control here. You can sell your home or refinance your mortgage. Nothing about that changes. You are simply the trustee of the trust while you (and your spouse, or whoever else you designate) are alive; when you die, your successor trustee can take over and follow your instructions without having to go through probate.
In addition to your home, you want to put all savings accounts and nonretirement investment accounts into your trust. Keep your IRA and 401(k) accounts separate from the trust, as they're governed by special rules (I'll explain more in step 5).
3. Have a will as well.
If a revocable living trust protects your major assets from probate, a will is where you carefully specify how you want your noninvestment possessions to be disbursed. Your great-grandma's wedding ring, the heirloom armoire, that cherished first-edition book collection—all of it should be itemized in a will. Do your family a huge favor by being as detailed as possible. Even if your children love each other to pieces now, arguments can easily arise if you don't have everything spelled out. If your children are older, consider asking them to share what would mean the most to them.
4. Don't make young children the beneficiary of any asset.
Laws prohibit anyone under the age of 18 from being able to directly inherit money or assets. If you name a minor as a direct beneficiary of an inheritance or a life insurance policy, you've inadvertently messed things up for him or her. No financial institution will release that money, and your child's guardian will have to jump through legal hoops to wrangle access to the funds to care for your child. Skip the potential mess and costly legal fees by setting up a trust to disburse assets to your child's guardian for the benefit of your child.
5. Double-check who gets what from retirement accounts.
Here's a sad scenario I have seen all too often: A couple gets divorced and divvies up their assets, but neither takes the time to review their beneficiary forms. Years go by. Each person names a new beneficiary in their trust or will—maybe a new spouse or a grown child or dear friend—and thinks they've taken care of matters. But if the ex-spouse was listed as the beneficiary of the IRA or life insurance policy, and that document was never updated, that's who is legally entitled to the money.
I want to be clear here: It does not matter what you say in your will or trust; the beneficiary document attached to your IRA accounts and your life insurance policy overrides what you say elsewhere. If you want to change the beneficiary, you must change the beneficiary document. One important caveat is that if you are married, your spouse is legally the default beneficiary for all 401(k) accounts. If you want to choose an heir other than your spouse, you'll have to file a written waiver (signed by your spouse) with the financial institution. A hassle? Maybe. But taking the steps to set up your estate properly might spare your family a world of woe in the future.
See What Good Your Gifts Can Do
There is no law saying you have to die before your assets can be passed to loved ones. In fact, gifting earlier can be a lovely way to witness how your money helps your family thrive.
If you want to make gifts now, the easiest way to avoid a tax bill is to limit your annual giving to $13,000 per recipient (the 2011 tax-free gift limit set by the IRS). Note that the $13,000 limit applies to individuals, not households. So you could give $13,000 to your grown son and $13,000 to his wife. And your spouse could give the same—resulting in a total of $52,000 free and clear of any tax. You can also make unlimited gifts to pay for someone else's educational or medical expenses without worrying about gift taxes.
Before you give away anything, though, think seriously about your own future: Today's 65-year-old woman will live an average of 20 more years, and you need to be sure your own retirement is secure before you contemplate giving anything away. Take care of your needs, and you'll be giving the most valuable gift to those who love you: Freedom from worrying about your well-being. And remember, what your nearest and dearest want most from you now is your love. That is the most precious gift you can give.
Suze Orman is the author of The Money Class: Learn to Create Your New American Dream (Spiegel & Grau). To ask Suze a question, go to oprah.com/omagazine_talk.
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Printed from Oprah.com on Saturday, March 8, 2014
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