Putting the financial house in order with a plan
Financial adviser says estate planning should go on year-end to-do list for those who don’t have last wishes recorded.
Most people reaching the twilight of life are aware they should make a will. But not as many realize the negative consequences of leaving the task undone, according to a local financial adviser.
Steve Starnes, principal at Grand Rapids-based Grand Wealth Management, said the ramifications of avoiding or improperly implementing an estate plan are numerous.
An estate might have to be divided up in probate court, which can be costly and strain family peace. An inheritance might go to ex-spouses or an 18-year-old family member not ready for the responsibility. Or, the deceased might have wanted part of the estate to go to charity but failed to put a plan in place.
“As a financial adviser, we can see what’s in people’s documents and see what updates are needed — their will, revocable trusts, power of attorney and medical directives,” Starnes said.
“If someone does not have a will, then the probate court is involved with distributing assets to family members. Generally, the probate process can be time-consuming, expensive and frustrating for family members.”
Starnes does not specialize in estate planning at Grand Wealth Management, but almost all of his conversations end up there. He said many clients, especially younger ones, lose sight of the importance of estate planning in the tyranny of the now. He urges them to put it on a fall to-do list or make it a New Year’s resolution.
A power of attorney (POA) document is a basic of estate planning, Starnes said. If an individual becomes unable to make decisions, a POA designates someone else to make those decisions on their behalf.
“If I have a client who develops dementia, and I fear he is making very bad financial decisions — perhaps wants to give a lot of money to a scam — how do I help? If the client has given power of attorney to someone, I can reach out to that person and, hopefully, protect the client from making a really expensive financial mistake,” he said.
Starnes also educates clients on best practices for ensuring an estate gets taxed for the maximum benefit of heirs. In 2002, the threshold for the estate tax was raised to $1 million, up from $675,000 in 2001. In 2010, the threshold was raised to $5 million, indexed to inflation, which means each year it inches up. In 2016, it was $5.45 million. In 2017, someone can pass on up to $5.5 million to beneficiaries without paying the estate tax.
For many people, putting an inheritance in a trust to protect it from estate tax — the old way of doing things — now simply means that any capital gains in the trust would be subject to tax when the trust changes hands after the surviving spouse dies and leaves it to children.
One of the life factors that can complicate the estate planning process, Starnes said, is a change in marital status.
“People get divorced, and that’s hard, so updating their will is not important,” he said. “But what if they pass away, and their money goes to an ex-spouse?”
This can happen if people update their wills but forget to change the beneficiaries of their retirement accounts and life insurance policies.
“Retirement accounts and life insurance both pass regarding the beneficiaries you name and not based on your will,” he said.
Another risk is the age of a child beneficiary at the time of his or her parent’s death.
“If someone has young children and dies without a will, when the children reach age 18, they inherit those assets outright,” Starnes said. “Unfortunately, young people often spend the money quickly and lose focus on figuring out what they want to do in life.
“I try to persuade people to structure it in their planning to leave (an inheritance) in trust until someone is 30 or older.”
Additionally, if someone wants to give 10 percent of their money to charity, they should know that putting that in their will only affects the portion of their estate that does not have separate beneficiaries named.
“When you open your IRA, you name beneficiaries. Say your will document says, ‘I want to give 10 percent of my money to charity when I pass away.’ If (you) have a house worth $300,000 and an IRA worth $1 million, and (you) say ‘I want to give 10 percent to charity,’ the charity may only get $30,000. The IRA will go to the kids or whoever is named a beneficiary.”
For tax planning purposes, Starnes said he would recommend people leave their house to the kids and the IRA to charity.
“If you inherit an IRA, you have to pay tax on that, even though it’s tax-exempt when the owner is putting funds into it,” he said.
Fairly often, Starnes said he hears from survivors who are disappointed a parent’s wishes to leave money to charity was not followed.
“I hear, ‘My dad always said he wanted to leave money to such and such, but he never put it in his will.’ I feel really bad about that.”
Starnes said West Michigan is more philanthropic than other communities in which he has worked, such as Washington, D.C., and the topic of charitable giving as part of an estate plan comes up more frequently here.
“I was in D.C. for a while, and it might come up 25 percent of the time in D.C., and I would say it comes up 60 to 75 percent of the time here,” he said.
“People don’t like thinking about what will happen after you pass away, but they’re really glad if you suggest something to them. Such as, ‘You’ve been giving $1,000 to the Grand Rapids Community Foundation every year; would you like to name them as a beneficiary of your estate?’
“I have sat with clients while they are talking to their attorney about legal planning, and my role is to say, ‘You mentioned giving money to Michigan State was important to you. I just want to remind you of that.’ That’s really our role is to hear what they want to do and help them implement it.”