Above all else, two issues impact the complexity and time and cost of the administration of a person’s estate more than the rest: the assets and the heirs. One of the keys from a planning perspective is to determine how best to position yourself to limit the complexity caused by those two issues.
It is likely your estate will require some kind of administration.
After a person dies, they own stuff. And necessarily, that stuff needs some kind of process to account for the stuff, divide the stuff, and distribute the stuff. Most people in Washington will go through a process called probate. Specifically a person’s estate generally goes through probate unless: (1) the person has a fully-funded Revocable Living Trust (in which case the trust estate goes through a process substantially similar to probate called Trust Administration); (2) the person has a surviving spouse and Community Property Agreement (in which case minimal administration of the Community Property Agreement is required); or (3) the estate consists of less than $100,000 and has no real property like a house or land or condo (in which case the estate goes through a process called small estate administration by affidavit). Contrary to conventional wisdom (and unlike other states), Washington has a simplified and streamlined probate process. Indeed, it often makes more sense, from a planning perspective, to plan to go through probate than to try to avoid it.
The mix of the assets and the value of those assets can weigh heavily on the administration of a person’s estate. Imagine that John’s estate consisted entirely of $500,000 cash in a bank account and he rents a one-room apartment with personal property worth about $2,000. Imagine that Frank’s estate is also valued at $500,000 but consists of: (1) a duplex in Richland with $80,000 in equity; (2) a personal residence with $120,000 in equity, (3) cash valued at $30,000 spread across three banks; (4) a timeshare in Arizona valued at $20,000; (5) cars and an RV and a boat valued collectively at $80,000; (6) a gun collection worth $20,000; (7) an investment account worth $150,000.
Though the assets are valued the same, John’s estate is much simpler to administer. The person in charge of John’s estate need only contact one institution (the bank). He or she needn’t put assets up for sale. John’s estate doesn’t require an influx of cash like Frank’s might (say, putting new roof on the house to maximize the sale potential of the property). John’s estate doesn’t require any safeguarding of assets.
The goal is not to live like John, but to be cognizant of the complexity caused by the asset mix and determine if the asset is worth the hassle. Sometimes simplification can be achieved by combining bank accounts or investment accounts. Sometimes it is selling a piece of land or oil/mineral rights that really aren’t yielding any income or happiness to the individual. By taking these steps during life, it can greatly reduce the complexity of the estate for the heirs.
Continuing with the example of John and Frank, let’s assume that John’s sole heir is his only living relative – his son Phil. Phil is the person in charge of the estate and the entirety of the assets go to Phil. Phil’s job is really quite simple. And, there is really no likelihood of any dispute or litigation because Phil is the singular person to benefit from the estate.
Frank’s heirs include his two children, Melissa and Tonia, as well as his two step-children from a later marriage, Tom and Chris. Frank appoints Melissa to be in charge of the fair and equal distribution of all the assets of Frank’s estate. Even though the Will spells it out that “all assets are split equally,” there are still plenty of issues to fight about. Why did Melissa choose that realtor and set the price so low for the house? Why did she sell the guns when really Tom wanted them? Even though Chris has been living in one-half of the duplex, both Chris and Tonia think they should receive the duplex.
As one might imagine, the potential for conflict and emotional turmoil is much much greater for Frank’s heirs. Again the goal is to be cognizant of the complexity raised by the number and type of heirs of the estate. While the “simplification” of the heirs is not necessarily a solution technique, a helpful option exists. Often the complexities raised by multiple or adverse heirs can be greatly diminished by putting a professional third-party in charge of the administration of the estate. Sometimes these third-parties are called professional fiduciaries. They charge a fee to properly and fairly administer the estate without bias and emotion. This can greatly reduce the potential for conflict and litigation as the heirs now have no emotional feelings toward the third-party. The professional fiduciary has dealt with just this scenario dozens of times before and has simple solution techniques to quickly work through the administration of the estate and get each heir the maximum value to which he or she is entitled.
Take stock of your assets and your heirs. If you think there might be ways to simplify either, start working on it now. Your heirs will be well served.
* Licensed, not practicing.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.