For many of our clients, a well thought out estate plan is a key component of their overall financial plan. A typical estate plan consists of a will, durable powers of attorney, healthcare powers of attorney, and sometimes one or more trusts.
For clients who are focused on protecting their assets after they are gone, limiting estate taxes, or placing structure around the distribution of their assets, having a trust can be a very effective estate planning tool. All of their assets can be tied back to the trust(s), allowing their estate to be administered per the language of the trust(s), outside of probate court.
For other clients, estate taxes are not a realistic concern and they would prefer that everything transfer to their heirs with no strings attached. Their heirs also tend to be grown, financially independent individuals.
When putting together an estate plan that does not use trusts, it is essential to ensure that all assets and insurance policies have the correct beneficiaries listed. This includes retirement accounts, brokerage accounts, bank accounts, life insurance policies, etc. Importantly, listing beneficiaries ensures that the assets will not be subject to probate when the original owner passes away.
Perhaps the most commonly overlooked asset when reviewing beneficiaries is one’s house. I’ve seen situations where an elderly person may have a very simple estate that consists of a bank account (with beneficiaries), a house, and a will. Upon their passing, the bank account goes directly to the beneficiaries. The house on the other hand will pass through the provisions of the will, but only after a probate judge reviews the will. It is important to note that a will is not an effective tool for keeping assets out of probate court. Probate can be time consuming and fairly expensive. However, probate can be avoided altogether by having the appropriate estate planning provisions in place.
In Michigan (and many other states), a Lady Bird deed (also known as a life estate deed) is a way to transfer property to someone else outside of probate, while retaining full ownership of the property during one’s life. I like to think of a Lady Bird deed as a beneficiary designation for real estate. Having a Lady Bird deed executed by an attorney can cost as little as $100-$200 and it can save a lot of legal complexity and expense when the owner passes away. I’m a big advocate of these documents, especially for individuals who have determined that their estate is not large enough or complex enough to warrant having a trust. Further, I’ve found that Lady Bird deeds can be simple and effective for clients who are trying to come up with a simple probate avoidance solution for aging family members.
All comments and suggestions are welcome.
Christopher W. Frayne, CFA®, CFP®