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  • Poterack Capital Advisory

You Can't Take It With You

There are two outcomes for your wealth. Either you spend and enjoy your wealth, or someone else will! We all seek to grow and protect our savings and investments in order to meet our own financial objectives. While your financial objectives are personal to you, at your death someone else will likely use your wealthin accordance with their financial objectives.

There may not be anything wrong with this from your perspective. After all, you’ll be dead. However, if it is important to you what happens to your wealth after you die, then effective planning and documents are critical!

The most common ways ownership is transferred after you die are beneficiary designations, wills, and trusts. Your choices and decisions, made while alive, will speak on your behalf when you can no longer speak. If you do not choose beneficiaries, get a will, or get a trust, then our court system and laws will make decisions on your behalf during a process called probate. Probate is the judicial process by which a decedent's estate is valued, beneficiaries are determined, an executor in charge of estate distribution is declared, and the estate is legally transferred to the determined beneficiaries. The probate process can be expensive due to attorney fees and filing expenses.

Many people are not aware that a beneficiary designation overrides will or trust language in determining who receives your assets. Beneficiary designations are common on 401k and IRA accounts, company benefits, life insurance, and annuities. If your beneficiary designation indicates “person A” gets an asset, while your will or trust says “person B” gets this asset, then “person A” will get the asset when you die. Therefore, keeping your beneficiary designations up to date is very important! Assets passed by beneficiary designation avoid probate.

A will is a legal document designating who you want to get your wealth and various possessions after you die. Think of the will as instructions from your grave. Nice thought, huh? You may choose an “Executor” to administrate the will and work within the probate process on your estate’s behalf. A will is used to distribute any assets that are not distributed by beneficiary designation or trust. A will is only valid after you die.

A trust is a legal document designating who you want to get your wealth and various possessions after you die. Think of a trust as a “super will” as there are differences with a will. You choose a “successor trustee” to administrate the trust when you are unable. A trust may distribute assets without probate, similar to a beneficiary designation. A trust may have its own tax ID number and own assets indefinitely after your death. You can be very specific how assets are distributed for many years or decades after you die. Because of this, some people use a trust to provide ongoing income for a special needs child, someone incapable of making responsible decisions with money, or to provide ongoing benefits like a scholarship, without liquidating principal held in the trust.

There are revocable and irrevocable trusts. Revocable trusts, like wills and beneficiary designations may be modified. Many people believe trusts protect assets from creditors and Medicaid. Trusts can be helpful in liability and Medicaid planning, but benefits are not immediate and come with significant limitations.Trusts can be

helpful in mitigating federal estate taxes. However, in 2023, every individual has a federal estate tax exemption of $12.92 million ($25.84 million for a couple) therefore the federal estate tax does not apply to the vast majority of Americans. If you have wealth above the federal estate tax exemption, the tax rates are highly punitive and you may benefit from the appropriate use of various types of trusts.

In my financial planning career, I’ve reviewed 100’s of wills and trusts but PCA is not an attorney firm and does not draft estate planning documents. It is my recommendation you review your estate planning documents and beneficiary designations every 2-3 years and when there are significant life events affecting prior choices.

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