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Small Bites Podcast: Estate planning basics

September 29, 2023
Estate Planning Basics

In this first episode of season two of Small Bites of Business Insights, Hosts Dr. Kathy Gosser and Rebecca McDade, J.D., discuss the importance of careful estate planning and review business owners potential wealth strategies that ensure a lasting family legacy.

Dr. Kathy Gosser, YUM! Assistant Professor of Franchise Management and Director of the Yum! Center for Global Franchise Excellence

Rebecca McDade, JD – Attorney


(NOTE: This is an automated transcription and not intended to be used as a substitution for listening to the podcast recording. Simply click on the player above and receive the full benefit of the conversation.)

Welcome to our first episode of Small Bites of Business Insights. It’s Talking Wealth Planning and Becca, I’m glad you’re with me today. Thank you. Thank you. I’m looking forward to this. Me too. Cause I’m going to learn a lot. So this first one, we’re going to talk about estate planning basics and there is so much information and basics that we’re going to have three parts to this.

And this is the first part, but let’s get us started and just let’s lay the groundwork Becca and tell us what exactly is estate planning? Estate planning is really the process that one can use. To control how his or her assets are distributed to his or her beneficiaries. So a lot of times when you hear about estate planning, you hear the word of a will or a trust, and those are documents that allow you to say who’s going to get your money when you die and how they’re going to get it.

Are they going to get it outright? Are they going to get it in trust? So in a state plan, And estate planning is really just planning for the distribution of assets, primarily upon death. Well, you know what, that sounds like it’s for really rich people, or people that are old and have accumulated tons of wealth.

So is it only for rich people or old people? So it’s really not. Um, estate planning… Is giving you the opportunity to decide, as I said, who’s going to get your assets, when and how, if you don’t put together your own estate plan, then the state does it for you, and each state has its own statute and an intestacy statute, and that statute says, if you don’t have a will, then your assets are going to go, usually it’s a split between your spouse and your children, So if there are other people, if there are charitable organizations, or if you don’t want your children to get things equally, or more often than not, you want all of your assets to go to your spouse and not be split between your spouse and your children, then you definitely want to have an estate plan and your wealth doesn’t matter.

It’s just, if you have assets that you want to control where they go, then you want to do an estate plan. Thank you. You know, because I’ve heard about if you don’t have an estate plan, when you die, the state takes everything you own. Is that even true or can they do that? So the state doesn’t really take what you own, but I hear that a lot.

If you don’t have an estate plan, the state will decide where your assets are going to go. But the other thing is, if you are above a certain wealth level, if you don’t have an effective estate plan, Then the IRS may take more of your estate than you would be able to plan for. So if you have an effective estate plan, you can minimize what taxes you’ll have to pay upon death.

Whereas if you don’t have an estate plan. That’s a little bit harder and the IRS may end up with more in their pockets. It’s not fun. Yeah, that explains a lot why folks say that. And not that anyone is opposed to paying taxes, but you also would like more of your wealth to go to your family than probably to the IRS.

Absolutely. I, I can definitely see that. And then we’re not going to talk about this in this segment, but I know it gets very complicated if you’re on a second or third marriage with children from the first marriage if you don’t have it. Right. Right. Absolutely. Estate planning really does give you the control as opposed to the state or other people that control and that’s what you want.

You worked really hard for your assets during your lifetime, put everything into your business. Why wouldn’t you want it to go how you want it to go upon your debt? Oh, I love that. I think that is the simplest version. As you decide where your assets go, you’re in control. And we love to be in control.

Let’s talk about some of these terms. And you provided me with a wonderful list. And we’re going to cover the first four in this segment. So what you would create during your lifetime. Okay, so a will is a document that you would create during your lifetime. And it says where your assets going to go upon your death.

When you create a will, as opposed to a revocable trust that we’ll talk about in the next segment, a will requires you to go through probate. And we will talk about the probate process. But the will lets you Decide who gets your assets, how they get your assets, and when. Um, and the will also allows you to name guardian for any minor children that you may have.

Oh, okay. So does a will have to be executed with an attorney or could you do, I’ve heard something called a holographic will. So each state has its own requirements with respect to a well, I would say almost every state requires that you’re over 18 years of age before you can do a well, you have to be competent, um, you have to have two witnesses and some states require that it be notarized.

Most states say that you have to have it typed up, so it’s not so much that an attorney has to do the drafting, but it has to be a typed document. A holographic will is one that you just write out by hand, you sign it, and then it’s witnessed by two different people. There are some states that do allow holographic wills, but most states do not.

I know Kentucky does, that’s why I asked about that, where we are located. So you could actually do a will using an online resource, because if you googled wills right now you could probably get a template you could download. So you definitely could do that, and LegalZoom is one that a lot of people I know have used.

I caution people on that. If you’re just doing a simple well, where it’s just, you know, like I’m giving everything to my wife or I’m giving everything to my kids, then those kinds of documents work well. If there’s any complexity at all that you’re doing, then you’re probably going to want to consult an attorney just because legal zoom doesn’t give you the nuances that can come from drafting an estate planning document.

And we normally think of wills as sort of simple, and a company like LegalZoom makes you feel like it’s simple, but I have actually seen estate planning documents that were contested, which means there was litigation over them, over the placement of a comma. Literally, there are cases over the placement of a comma.

So you want to be a little careful if there’s complexity in your estate plan. I think it’s probably an analogy I think of is when you can use the online tax services versus having to go to an accountant. So once you start to have some complexity, you really need an expert. So what is an executor of your will?

What does that mean? So the executor is the person that you name in the will. And that’s a person who’s going to administer your estate. So it’s a will. And I said, you’re going to have to go through a probate process. And so. The executor is the person who files your final income tax return, who collects all of your personal property and distributes it out to the people that you’ve named under the terms of your trust.

They’re the ones who go through your closets and donate the assets that your beneficiaries don’t want. Um, If you’ve got an estate that requires the filing of an estate tax return, then the executor does that. It used to be when I first started practicing 35 years ago that everybody thought naming someone as an executor was an honor.

Um, it really isn’t. It’s a lot, a lot of work. When you look at your house and you look at everything in your house, It’s the executor who has to figure out how to get rid of all of that, your dad, and that’s a lot of work. That is a lot of work. Are they typically paid? So a lot of times if the executor is a family member, typically they don’t get paid.

They can, but typically they don’t. But if I’m naming a friend or. Even worse, a corporate fiduciary like a bank as my executor, then they will get paid and that cost can be kind of expensive. So if you name like a bank to act as executor, they may charge one or 2 percent on the value of all of your assets.

If you’re naming a family friend, there’s no set fee normally for what they can charge, but They’ll usually charge an hourly rate, and I’ve seen hourly rates run between like 35 an hour to a couple hundred dollars an hour. Wow. But as you said, it could be a lot of work depending upon the size of the home, all the assets that are there, because I, I think it could be a lot of work.

Absolutely, it is a lot of work. That makes sense. And you’re right. It used to be thought of as an honor, but it doesn’t sound like much of an honor right now. Except I’ve asked my parents not to name me. Exactly. Smart. So there’s also a guardian. So I guess when children are involved, there’s a term called a guardian.

Can you explain that please? So the guardian is the person who… You would want to take care of your children if something happens to you and your spouse. So if something happens to you, your spouse is going to take, um, over the upbringing of the children. But if both of you have passed, then you want to name somebody else to act as the guardian of the children.

And there are two types of guardian. There’s guardian of the person and guardian of the estate. They don’t have to be the same person. The guardian of the person is the one where the children are going to go live with that person, and that person is going to take care of their daily needs. The guardian of the estate is going to be in control of any assets that are titled in the name of the child’s name.

So if you set up a bank account for the child, for your son or daughter, um, The guardian would take over the management of that account. The guardian is somebody who you name, but they have to be appointed by the court. So just because you name them doesn’t mean that they will actually become the guardian.

The court actually has to determine that they would be the best person to take care of the children in the children’s best interests. Oh, and that could probably be contested once you say it can definitely be contested. And I’ve actually seen it in several circumstances where it’s gotten very ugly with both sides of the family fighting over the custody of the children.

That’s tough. That’s tough. And then the last term we’re going to discuss in this segment is the probate process, which sounds super scary, Becca. So help us through that. So the probate process is one of those things that everybody talks about, Kathy, like you did. Like it’s a very scary process. And in some states it’s more onerous than others.

But generally what happens with the probate process is. It’s the transfer of assets from your individual name to your beneficiary. So what happens is during your lifetime, you have assets and you title them in your name. And then when you die, there’s no way to get assets out of your name into the name of your children or your spouse without the probate process.

And so the way it really works is upon your death, a probate estate is opened and all of the assets are collected in the probate estate. And it is, the probate process is a court proceeding. The judge makes sure that creditors have been paid, all debts have been paid, um, if there’s any litigation out there, for instance, if there was a wrongful death or something along those lines that all litigation has been taken care of.

And then once those matters have been handled, the assets are then transferred from the probate estate to the named beneficiaries. Probate process can take anywhere from six months to two years, depending on complexity. And depending on each state, either the court is very involved in the probate process, Or they can have limited participation where it’s just opening and closing the estate.

Is that why sometimes it’s recommended that especially with your spouse that you put things in an or like your name blank or blank versus and or just one person’s only because you can avoid that? So joint tenancy does allow you to avoid probate because if I own it jointly with my husband it will automatically go to my husband upon my death, in which case we’ve avoided probate.

I would, again, with a caution, depending on the complexity of your estate, um, instead of relying on joint tenancy, you might want to rely on a revocable trust, which we’ll be talking about in the next segment. Yes, which are very confusing. I can’t wait to talk about that, but you’ve given us a lot to think about here, Becca.

Thank you so much. Join us for the next session where we are going to talk about the world of trusts.