Why understanding your assets is crucial to a successful estate plan

by Christopher L. Kelly, Esq.

My grandmother made the best apple pie I have ever tasted. Watching her take the ingredients and put them together just so was a sight to behold — especially since she did not have all the ingredients written down! When she passed away, she handed the recipe down to my mother, but neither she, nor my sister or even my wife could replicate it. Their pies were pretty good, but they still did not taste like my grandmother’s. Why? We did not have all the ingredients!

The same can happen with an estate plan. You can develop a pretty good plan, but if you don’t know all the ingredients (i.e. assets), it may not turn out the way you intended. Knowing what makes up your estate is very important, because what you desire to accomplish with the distribution of assets at your death depends on the type of assets to be distributed.

You have several classifications of assets in your estate, including liquid assets (checking and savings accounts) and non-liquid assets (real estate, investments, retirement plans and life insurance). While all of these assets make up your estate, they are handled differently when distributed upon your death. 

Let’s look at two asset examples:

• Personal property – These assets are part of your gross estate and the portion of the estate handled in the probate court. They are distributed to the person(s) you name in your Last Will and Testament (LWT). It’s one of the easier assets to handle.
• Life insurance – This asset is also part of your gross estate, but it is not a part of your probate estate. Life insurance passes to a named beneficiary after your death.

You may ask, “What’s the big deal? Why do I need to be concerned about asset classifications?” It becomes a big deal when your intentions, based on what you have written in your LWT, are not accomplished because you did not consider the types of assets you have and how they are passed to beneficiaries. The bulk of your estate could actually pass outside the terms of your LWT. Let’s explore how this plays out:

Let’s say Mrs. Jones is widowed with two grown children. She has an estate made up of $20,000 in a checking account, some furniture ($5,000), a vehicle ($5,000) and a life insurance policy worth $100,000, in which each child is 50 percent beneficiary of the policy. If we add all these together, her estate would be worth $130,000. In her LWT, she wants 30 percent of her estate to go to her church and 70 percent to go to her children. Therefore, she intends, based on the amount of assets she has, that $39,000 will go to the church and $91,000 will go to her children.

Based on her assets and how they are classified, however, will her wishes be carried out in that way?

Per the beneficiary designation calling for the policy to be divided equally between her children, the life insurance will go to her children and will not be a part of her probate estate. The children, therefore, receive the $100,000.

What assets are left? The remaining assets $30,000 make up her probate estate. Based on her LWT, the church would then receive 30 percent of the probate estate ($9,000) and the children would receive 70 percent ($21,000). The church, therefore, ends up with $9,000 and the children receive $121,000 total. Is this what she intended? Not per her LWT. She did not take into account that the life insurance would pass to her children outside her probate estate.

This scenario often occurs in estates. Life insurance, retirement accounts and annuities normally are controlled by your beneficiary designations and not your LWT. If Ms. Jones had assessed the type of assets she owned, she could have made different decisions to carry out her true wishes.

So how can you avoid issues like this? Download our 10 Minute Estate Audit, then contact us and we can walk you through the process of putting your Estate Plan in order. We’re ready to help!

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Please note that the advice offered in this article is not intended to be construed as tax, legal or accounting advice. This material has been prepared for general informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice for the reader. You should consult your own tax, legal and accounting advisors before engaging in any transaction.