Comprehensive estate settlement plan essentials
A trust or will is only the first step
When many high-net-worth individuals execute an estate plan with an attorney, they believe they have completed the necessary steps to create their desired legacy. But in many cases, they have overlooked a key step in their estate planning: understanding the administration requirements. Knowledge of the administrative details helps create a clear settlement road map that outlines the role of the key players—fiduciaries, beneficiaries and outside advisors, such as attorneys and accountants.
"An estate plan is like the blueprint for a new house," says Katie May Yoder, national trust and estate practice leader at Fifth Third Private Bank. "It provides instructions, but you still need a contractor to actually build the house—that’s the settlement process. During the building process, there are likely going to be obstacles. The flexibility to efficiently resolve these issues is important. Because personal situations and laws change, the estate plan and administrative implementation should be reviewed on a regular basis."
When drafting an estate plan, Yoder recommends finding an attorney experienced in handling estate planning and administration. The legal and tax implications of improper planning can be extensive if not addressed appropriately and reviewed regularly by a practitioner who focuses on this complex area of planning.
Advantages of a trust
It is common to hear that the probate process—a court supervised administration of your estate according to your will—is one that you should always attempt to avoid. A revocable living trust, administered by a trustee and not subject to court oversight, is the foundational vehicle used to achieve that result.
The advantages of using a trust are threefold:
- The post-death settlement of a fully funded trust does not require going through a court-mandated probate process, offering considerable savings in terms of time and legal fees.
- The terms of a trust are private, and only trust beneficiaries are entitled to information about those terms, including to whom and how (outright or continuing in trust) the grantor’s assets pass. In contrast, the details of a will that goes through probate are part of a public record that is accessible to anyone.
- While a will only takes effect when you die, a trust becomes active the moment you create it. This allows you to appoint someone to make financial decisions about the assets in the trust in the event of your inability to do so, such as a disability.
Probate process advantages
Yoder points out, however, that the probate process may also have benefits for high-net-worth individuals. The main one is cutting off creditor claims at an early date, often six months after the will is settled, with finality. A trust may be subject to creditor claims for as long as two years, depending on the jurisdiction. "When we have doctors or lawyers or entrepreneurs who have a lot of business deals, it may be beneficial to go through the probate process and reduce the time window for creditor claims," Yoder says.
A solution for many individuals is to set up what’s known as a pour-over will in the estate plan. This will transfers all the assets in the estate into a trust so the estate receives the same privacy protections of a trust after going through probate. How the assets are divided among heirs, for example, remains private.
Spell out administrative steps
After a foundational estate plan is created, it’s in the grantor’s and their family’s best interest to fully understand the settlement plan. The plan might include a detailed timeline for determining what assets need to be sold and when, getting new deeds for properties owned and deciding how estate and income taxes will be handled. For more complex estates containing assets that are difficult to divide, such as a privately held business where only two of three children are involved, a large farm or a highly valued collection of tangible personal property, these administrative steps need to be spelled out. Failure to properly address the division of assets could lead to family disputes that result in costly litigation or cause the asset to suffer from mismanagement or operational paralysis.
Family dynamics should also be an important consideration in the settlement plan. Blended families, dependent or disabled children or equalization of gifts made during life add complexities to the settlement.
The funding of the trust is crucial to receive the benefits of the plan. Work with your financial team to make sure beneficiary designations on assets such as life insurance, annuities and retirement assets are correct—families often change with the passage of time. Further, there are significant tax benefits to directing qualified assets in a 401(k) or IRA directly to charity if you are charitably inclined.
"It’s not a one-and-done kind of process," Yoder says. "You have to review the terms regularly to make sure you are up to date on any changes in laws and how that might affect your personal situation. "Estate and settlement plans should be reviewed every three to five years or when a major life milestone occurs, such as a birth, death or disability of a loved one.
For more information on how to create a comprehensive road map to settle your estate, contact your Fifth Third Private Bank advisor.