Post: Why You Need to Know What’s in Your Estate

Apple Pie Slice

Why You Need to Know What’s in Your Estate

by Rev. Bill Gruenewald

Knowing what assets you have is critical for effective estate planning

My grandmother made the best apple pie I have ever tasted. I would watch her take the ingredients and put them together, and it was a sight to behold. However, she did not have all the ingredients written down on the recipe she handed down to my mother. So, after she passed away, my mother, my sister, and even my wife tried to make my grandmother’s pie. These pies were pretty good, but they still did not taste like my grandmother’s. Why? We did not have all the ingredients!

You can develop a pretty good estate plan, but if you do not know all the ingredients (aka “assets”) it might 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 asset to be distributed.

You have several classifications of assets in your estate: there are 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 they are distributed at 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 that is handled in the probate court. They are distributed to the person(s) you name in your Last Will and Testament (LWT). That one is pretty easy.
  • Life Insurance – This asset is also part of your gross estate, BUT it is not a part of your probate estate. Why? Because this is an asset that passes after your death to a named beneficiary. 

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

Let’s say Mrs. Jones is widowed with 2 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, which each child is 50% beneficiary of the policy.

If we add all these together, her estate would be worth $130,000. In her LWT, she wants 30% of her estate to go to her church and 70% to go to her children. So, what she intends based on the sum of her assets is that $39,000 go to the church and $91,000 to her children.

But based on her assets and how they are classified, will her wishes be carried out? Let’s see!

The life insurance (per the beneficiary designation that calls for the policy to be divided equally between her children) will go to her children and not be a part of her probate estate. So, they get the $100,000.

What assets are left? The remaining assets $30,000 make up her probate estate. Based on her LWT, then the church would get 30% ($9,000) and the children would get 70% ($21,000). So the church ends up with $9,000 and the children get $121,000. 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 is a scenario that happens often in estates. Life insurance, retirement accounts, and annuities are normally controlled by your beneficiary designations and not your LWT. If Ms. Jones had looked at the type of assets she had, 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 are ready to help you! CLICK HERE to get started.  

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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.