Where There’s a Will (or not)

A financial planning engagement generally includes five broad topics: investments, insurance, retirement planning, estate planning and taxes. I’ve written about most of the other aspects recently but it’s been a while since I’ve discussed estate planning. An estate plan might be as simple as having a lawyer draft a brief will or it might require considerable thought about charitable giving and/or the establishment of trusts. Although I’m not an attorney and I do not provide legal advice, I have come upon some interesting data from the Lawyers.com website and a survey published by the US Trust Company. I’d like to share some information from each.

Let me begin by saying that in Indiana, everyone dies with a will. It might be one developed with the assistance of an attorney and a planner to meet your specific needs or it might the one size fits all version provided under Indiana law. Whichever it is, due process will be honored. Before a will goes into effect, some items pass to heirs via operation of law. These include jointly-owned property and assets covered by the beneficiary arrangements which are part of most insurance policies and retirement accounts. Establishing accounts as Transfer on Death (TOD) changes ownership of assets in the same way. Such titling decisions can be made and changed whenever necessary but should always be done with the client’s overall goals in mind. Adding someone’s name to a bank or investment account could materially affect the distribution of assets or even force the opening of a probate estate when a trust was intended to take care of everything.

According to Lawyers.com, only 35% of adult Americans currently have a will. Among those polled by US Trust (all of whom have more than $3 million in investible assets), 91% have a will but only about half of them have given instructions about the distribution of personal property and only about 20% have introduced their heirs to their planners. After many years of providing planning services for a wide range of clients, neither of these results surprises me. Generational planning is a concept that’s difficult for many people. For one thing, it forces individuals to address their own mortality. It also requires the sharing of very personal details with at least a planner and an attorney, ideally with their heirs as well. Perhaps most difficult of all, such planning sometimes obliges people to face the fact that their adult children are simply not ready to handle a significant inheritance.

In our practice, we’ve learned that estate planning often involves more than money. Under this broader definition people have a chance to share values with their children and continue to guide them even after death. Although over 90% of the wealthy Americans surveyed by US Trust are interested in giving back through volunteer activities, only about half have sought professional advice about legacy planning and only about that same percentage have discussed the responsible handling of wealth with their children. When we understand philanthropy is important to a client, we usually suggest what’s known as an ethical will or letter of intention. Thisis not a binding legal document but more of a narrative way to communicate with heirs about handling money, especially as it relates to charity.

As Ben Franklin famously said, both death and taxes are certain. However, death taxes have come and gone over the years. Regardless of whether financial assets transfer via law or will, all are included when the estate is valued for purposes of estate/inheritance taxation. Indiana inheritance taxes are owed by beneficiaries, the exact percentage depending on the amount inherited and how closely the recipient is related to the deceased. In early March, Indiana’s lawmakers agreed on a plan to phase out that tax, believing that many people leave the state for tax-friendlier climes and take the remainder of their lifetime spending with them.

Federal taxes may be due on an estate depending on its size but, if so, they are deducted from it rather than being paid by the heirs. Currently estate tax laws exempt the first $5 million in assets and the initial rate of 35% is the lowest it’s been in 80 years. The “Credit Shelter” trusts which were popular in the early 90′s have become much less important as federal tax rules have been relaxed and now snare fewer members of the middle class.

So if estate planning is important, why do only about a third of Americans have a will in place? It shouldn’t be the cost. Columbus is a relatively small town and I find the fees charged by local attorneys so reasonable that they’re simply not a barrier to anyone who reads my articles. One final look at the US Trust survey shows that about 40% of those surveyed (remember, all with over $3 million in investable assets) don’t consider themselves wealthy. Perhaps if you don’t think of yourself as wealthy, you don’t feel the need for estate planning. But, as we rediscover at Warren Ward Associates almost every week, not being prepared can cause additional and unnecessary pain to those who remain behind.