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Estate Planning Isn’t Just for the Rich

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By Grace S. Yung, CFP

When you hear the term “estate planning,” you might automatically think of people like Bill Gates or Warren Buffet who have a large amount of assets to protect. But the reality is that this type of planning is actually important for everyone, regardless of how many assets you have or what your marital status is.

This is because planning not only allows you to decide who gets your property at your passing, but it also allows you to set up your assets in ways that can potentially minimize taxes. If you have minor children, an estate plan can provide you with a way to choose a legal guardian for them. The right estate plan may also prevent your assets from going through a lengthy, time-consuming, and sometimes-costly probate process.

Estate planning can be particularly important for those in the LGBT community, because if you have a blended family, it can allow you to clarify your wishes rather than simply relying on what the law automatically dictates.

The Ins and Outs of Probate

Probate is a legal process where a person’s will is reviewed in order to determine whether or not it is valid. This process also refers to the general administration of a person’s will, as well as the estate of a person without a will.

If you pass away in the State of Texas without having a will, the law states that your assets will go to your next-closest relatives. Those who don’t have a will are referred to as dying “intestate,” and their assets therefore pass under “intestate succession” laws. In Texas, only assets that would have passed through your will are affected by these laws—which typically only include assets that you own in your personal name.

According to Texas law, if you are married and you pass away without having a valid will, the assets that your spouse will receive depends in part on whether you and your spouse owned your property as community property or as separate property.

Typically, community property is considered to be property acquired while a couple is married, as opposed to the separate property acquired by one or the other spouse prior to marriage. There are, however, some exceptions. These include inheritances and gifts that were given to one spouse. These are considered to be separate property, even if they are obtained during the time the couple is married.

Upon death, your spouse would inherit half of the community property. If you have separate property, however, your spouse could inherit either all or just a portion of it. How much he or she inherits will depend on whether your parents are still living, as well as whether you have children and/or siblings. If you do, then your spouse will share the separate property with these individuals.

Bypassing Probate by Designating a Beneficiary

In some cases, you can bypass probate. This is because certain assets allow you to designate a beneficiary (or beneficiaries) who can directly inherit or acquire the funds or property upon your passing.

For example, some assets where you designate a beneficiary include:

• Life insurance

• Annuities

• Retirement Accounts (IRAs, 401(k)s, 403(b)s, etc.)

You can also establish a transfer on death (TOD) or payable on death (POD) beneficiary designation on a bank account, as well as on some types of brokerage accounts. The assets that transfer to your heirs automatically upon your death won’t generally be subject to the terms of your will. In other words, the beneficiary designation will take precedence over the will.

Trusts and Other Planning Considerations

Estate planning can ensure that you have control over your assets, as well as your final arrangements such as your funeral and memorial plans. Now that same-sex couples are legally allowed to marry, many couples can take advantage of the different types of trusts that are used in the estate planning process.

For example, one type of trust known as the Qualified Terminable Interest Property (or QTIP) trust can be set up that allows a person to provide for their surviving spouse, while at the same time maintaining control of how the trust’s assets are distributed after the surviving spouse’s death.

With a QTIP trust, the income (and sometimes the principal) that is generated from the trust can be provided to the surviving spouse with the goal of ensuring that they are taken care of for the remainder of their life.

For those who are charitably inclined, trusts can be used to benefit both individuals and favorite organizations such as the AIDS Foundation Houston, The Montrose Center, or Lazarus House. As an example, a donor can place assets into a Charitable Remainder Trust (or CRT) and then have the trust pay a named beneficiary for a certain period of time. After that period has passed, the remainder of the estate is then transferred to a charity beneficiary. CRTs can also be set up in such a way that when the grantor of the trust passes away, his or her spouse can become an income recipient of the trust for the remainder of their life. After that person dies, the charity will receive the remainder of the assets from the trust.

Keeping Other Financial Plans in Check

In addition to planning your overall estate, it is important to ensure that all of your financial and insurance plans are reviewed regularly in order to ensure that they are still meeting your current needs. This is because you could end up either unintentionally disinheriting someone or including someone in an inheritance that you no longer wish to have included.

Here’s an example. If you had a will while you were married, but now you are divorced, the will becomes null and void. However, you still have other financial and insurance plans that include beneficiary designations. You may, for instance, still have an ex-partner listed as the beneficiary of your IRA or your 401(k) plan. If something should happen to you, would you still want these funds going to them?

This is why all of your financial plans should ideally be reviewed at least once per year—and more often if you’ve had some type of major, life-changing experience such as a birth or death in the family, marriage or divorce, a new job, the purchase of a new home, or retirement.

It’s also important to note that you really shouldn’t have your “estate” listed as your beneficiary. That would force those assets to go through probate, and it can open up your estate to creditors during the probate period—presenting even more potential issues for your loved ones.

It’s Never Too Early to Plan Ahead

While many may think that estate planning is just for the wealthy or for those who are close to retirement, the truth is that it is never too early to name guardians for your children, state who you want to have certain assets, and ensure that Uncle Sam doesn’t take most of your money in taxes. Your estate plan isn’t something that you can simply “set and forget.” Since life is constantly changing, you should regularly review your plan in order to make any necessary changes and adjustments.

When you’re putting your estate plan in place, it can typically take the efforts of several professional advisors because of the mix of financial, tax, and legal issues at hand. Therefore, you may need a trusted investment advisor, as well as an attorney, a tax professional or CPA, and a trust company. It is best if all of these entities can work together and communicate the details of your plan with one another.

It is also a good idea to choose professionals who have a focus on working with the LGBT community. That way, you can be more assured that your advisors are updated on any new planning strategies and/or legislation that pertains to you and your needs.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Personal finance-related questions may be emailed to [email protected].

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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