What to do when financial planning does not exist

Last year I got a phone call from a CPA. He was referring to me a recent widow for assistance with financial planning.

Her husband had passed away, and she was overwhelmed by the deluge of paperwork she needed to complete following his death. In addition to the emotional stress from losing a loved one, she was charged with managing the family finances, a task with which she had no experience.

They were both in their 50s. The husband had children from a previous marriage, and they had two children together. Neither had collaborated with a financial planner or an estate planning attorney to plan for their future. The widow trusted her husband. He was a successful business owner, and she assumed their finances were in good order.

After the husband died, the widow’s life quickly changed. While they owned the business together, they also owned many rental homes throughout the region. The rental homes were managed by the husband, which worked well when he was alive. Unfortunately, once he died, things changed quickly. The rental homes were held in the name of the husband as sole and separate property.

Due to the lack of estate planning, they had never discussed the ramifications of how the rental titles would affect the widow after her husband’s death. Because the titling was not in the widow’s name, the rentals would need to pass through probate before she had access to them. This also meant the disbursement of the income and sale of the rental property would be shared with the legal heirs to the estate, according to California state probate code.

Because the husband had separate property assets, the legal heirs included his living children, and his deceased daughter’s children from his former marriage (with whom the family had no relationship). The loss of assets mandated by the probate law affected the widow’s future.

So, what steps should your family take to avoid a similar position?

Review your net worth

A person’s net worth is established by subtracting total liabilities (what you owe) from total assets (what you own).

A statement of net worth is a personal balance sheet of your finances on a given day. You should check this annually.

Simply, your statement of net worth is a snapshot of your finances. It provides a clear view of your assets and liabilities, so you can plan accordingly for your future. Without this, it’s difficult to plan appropriately.

In the case of the widow, while the couple had minimal debt, the stress from not knowing the financial situation caused her health problems.

Implement estate planning

Establishing a will and funding a trust is necessary to avoid probate in California.

When assets are held in a trust and titled in the name of the trust, they will be distributed according to the direction of the trust.

Once a trust is established, the title of the assets must be physically changed from your name to the name of the trust.

When assets are not titled appropriately, and probate is opened, the courts will follow state statutes to determine the rightful heirs. The court-appointed heirs may not be who you wanted to inherit your assets.

Additionally, the administration of an estate in probate is expensive. All probate fees in California are pre-determined by the state.

Assets funded in a trust will remain private. Those in an estate that are not in a trust must pass through probate and become a matter of public record.

Due to the lack of planning, the surviving spouse in our example was surprised to learn the real estate rentals were titled solely in her husband’s name, meaning the assets would pass through probate before being distributed to his heirs.

If you die without a will in California, your assets will go to your closest relatives under state intestate succession laws. Whether her husband meant for it to happen or not, the widow will only receive a percentage of the income and proceeds from the sale of the real estate.

Review titling, beneficiary designation

The way in which assets are titled will determine who controls the assets, tax consequences, whether the assets are subject to creditors’ claims and who will receive the assets once you pass away. All of this is a critical part of estate planning.

Even the best plans can be undone if the assets are not titled correctly. Understand your titling options and the ramifications to ensure they are consistent with your goals.

Beneficiary designations are typically used for retirement plans, annuities and life insurance policies, which allocate who gets assets or death benefits. Assets with a beneficiary designation will pass outside a trust and avoid probate but need to be reviewed annually to confirm that the titling aligns with the overall estate planning.

In the case of this widow, she learned she was the primary beneficiary on assets under beneficiary designations, providing her with cash to cover income tax owed and her living expenses until the probate assets were distributed.

When you fail to plan for financial well-being, you and your loved ones can be at a disadvantage. It’s common to assume that all is well because everything is working.

In the case of your finances, poor planning may not surface until a death, and by then it’s too late to address. Take the time now to meet with advisers to review finances and implement an action plan that’s beneficial to you and your loved ones now and in the future.

Teri Parker CFP® is a vice president for the Riverside office of CAPTRUST Financial Advisors and has practiced in the field of financial planning and investment management since 2000. Contact her at Teri.parker@captrust.com