Paperwork! No matter the importance, some people just aren’t into it. Others simply don’t have the time. It often seems that the amount of paperwork that must be completed just to function adequately is overwhelming. The potential costs of not completing certain paperwork, however, can be great. Many types of personal financial-related paperwork often go inadequately completed or not filled out at all. It can save you a lot of money and headaches in the future if you review basic financial paperwork every few years with your financial advisor, insurance agent and attorney.
A beneficiary form, for example, is usually completed when any type of IRA is opened or insurance policy is taken out. It is important to recognize that the IRA beneficiary form precedes a will – that is, whoever is listed as a beneficiary of the IRA will receive the money outside of any probate process or provisions of the will. Fail to have a beneficiary named, and the IRA assets are subject to probate – which can be costly. It is a good idea to not only list primary beneficiaries, but also secondary beneficiaries in case something happens to the primary beneficiary(s). In addition, you forfeit the ability to convert an inherited IRA to a “stretch IRA” if no beneficiary is named. A stretch IRA allows a designated IRA beneficiary — the person named as the beneficiary on the IRA beneficiary form — to extend distributions over his or her lifetime rather than over a shorter, less favorable payout period calculated off the original owner’s lifetime. I have seen many clients in my office where no beneficiary is named on the IRA beneficiary form. Save yourself and your loved ones the cost (and hassle) of probate and preserve the ability to use the stretch feature of an IRA by making sure your beneficiary forms are updated. Life insurance and annuity assets also pass outside the provisions of any will. If no beneficiary is named on an insurance policy, the insurance company will generally require you to name one before the policy is issued and in force. The importance of making sure insurance policy and/or annuity beneficiaries are updated and are properly coordinated with one another cannot be overemphasized. One final note: with more substantial estates and/or you have minor children, it’s often a good idea to name the primary beneficiary as your spouse and a “testamentary trustee designated in the insured last will and testament” as the contingent beneficiary to preserve tax benefits and other planning by your wills. This is a complicated issue and should be discussed with an estate attorney.
Another common mistake I see in financial documentation here in Texas is joint accounts held as “joint tenants with rights of survivorship,” often abbreviated on statements as “JTWROS.” Jim Floyd, an estate attorney here in Austin, explains that while the JTWROS designation creates a non-probate and speedy way of transferring estate assets to a surviving spouse, designating the assets as “community property” (Texas is only one of nine community property states) on your account documents may be a better way. With JTWROS, only the decedents half of the joint property enjoys a “step up” in tax basis. Contrast that with property/accounts held as community property, where both halves of the community property are stepped-up in basis. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of inheritance, not the value at which the original party purchased the asset. For example, say your husband purchased some shares of a stock for $10 in 1989, and he left them to you upon his death, at which time the shares are $50. This will potentially save the spouse a lot of money, since any capital gains taxes she pays in the future will be based the $50 price rather than the purchase price. Another account tilting feature is “Tenants in Common.” This is generally o.k., but there is no survivorship feature. The decedent’s share passes either under a will or goes through probate (intestacy stature). Again, it is always advisable to speak with an attorney.
Speaking of joint ownership by spouses, did you ever consider how difficult it would be for a spouse to gain control of management of the household affairs after the death of his/her spouse? This situation could be even more difficult for the surviving spouse if he/she did not handle the finances. Every household should have a notebook, storage place or other method of listing every financial, insurance and estate-related account and advisor, what function they have related to the household and how to contact them. One example that our firm has created is what we call a “family planner.” The family planner consists of recordkeeping and data storage section containing all financial-related documents along with a referenced educational module for different types of investments and insurance. A second recommendation and advice section contains customized strategies for asset allocation based on the family risk profile as well as estate transfer information for beneficiaries. This benefits a family heir and/or trustee - often a spouse, oldest child, attorney, etc…. - by assisting them with the tools they need to carry on the family finances successfully with less learning curve, worry and hassle. The last thing you want is an heir under emotional distress from the death of a spouse trying to learn how the family finances are run.
A few other final paperwork issues can ensure more efficient handling of financial chores. Always keep your account address, phone numbers and email current with your financial firm/advisor or any in which you deal in money. Many people forget to do this, especially on smaller accounts. This may result in you not receiving timely investment recommendations and advice from your advisor which may cost you money! Or, your investment documents could end up in someone else’s mailbox – a serious breach of privacy and confidentiality. Or, the assets could be simply lost and they end up in unclaimed property accounts with the state. If you suspect you may have unclaimed property, you may attempt to find out here: http://www.window.state.tx.us/up/. Finally, if you recently changed your name due to marriage or divorce or other reason, be sure and change the account titling as soon as possible. Getting new account titling is also applicable when a child becomes 18 years of age and has a UTMA/UGMA or has reached an age designated by a trust to take full possession and control of assets. Getting the financial paperwork in the proper name will ensure that the assets are easily accessible and transfers occur without necessity of substantial additional paperwork.
Making sure you have these details related to your financial documents in order will save you plenty of time, money and legwork down the road. If you think you are deficient in this department, contact your “financial quarterback” (often your financial advisor/broker) immediately. You’ll likely want to follow up with a C.P.A. and estate attorney as well.