Among the “top financial fears” of Americans, a survey by WalletHub found that 35% of respondents said an unplanned emergency was their biggest fear, while 23% cited not having enough retirement savings, and 16% are worried about job loss.
The common denominators among these fears are a lack of savings and a lack of planning for unforeseen economic circumstances.
Building an emergency fund and saving for retirement are very important objectives, but financial planning should not end there. Many other areas require attention, and overlooking them could create unexpected problems for you or your heirs.
What other aspects of your finances should you address to ensure you and your family avoid a future financial mess?
Is your estate plan current?
Recently, a certified public accountant (CPA) referred a widow to me who was overwhelmed with her finances following her husband’s death. During meetings with the CPA, she was often in tears. When her husband was alive, they had not completed any estate planning, and his passing left the estate in disarray.
Before their marriage, her husband had purchased minority interests in several rental homes. During the marriage, he bought out his partners and acquired full ownership. At that time, he asked his wife to sign a spousal transfer deed relinquishing her ownership rights. His intent in doing so remains unclear. She didn’t ask questions because she trusted him. Unfortunately, the outcome is now being determined under California probate law.
The estate has been in probate for months and is nowhere near resolution. The widow is expected to receive one-third of the estate, with the remaining two-thirds allocated to the children. She never anticipated receiving such a small percentage of the estate that she and her husband spent years building.
In addition to this disappointing outcome, probate is costly. Attorney fees, court accounting charges, bond expenses, and tax preparations will all be deducted from the estate before any distributions are made to heirs.
Adding to this financial burden is the stress of managing the real estate portfolio. Even with the assistance of a property manager, decisions need to be made frequently, quickly, and often at significant cost.
Sadly, this situation could have been avoided with proper estate planning. If the real estate assets had been placed in an appropriate trust, the transition to the surviving spouse would have been seamless. Additionally, the surviving spouse would not have been required to share assets with anyone else. Unfortunately, the lack of estate planning and reliance on probate will have lasting negative consequences for the surviving spouse’s financial future.
Do you ynderstand your investments?
Years ago, a client thought it was in her best interest to sell a valuable piece of land. Real estate had appreciated, and the timing seemed ideal to liquidate the asset to help fund her retirement cashflow needs.
She was referred to a Realtor and immediately signed a contract to list the property for sale. The real estate sold quickly.
During this period, the Realtor proposed deferring taxes on the sale of the property through a 1031 exchange — a strategy that allows you to defer capital gains by reinvesting the proceeds from the sale of real estate to a like-kind property.
The agent presented a favorable proposal to purchase income-generating commercial real estate with 50% ownership interest.
In theory, the strategy sounded logical, so my client proceeded to move forward. Unfortunately, it did not work out in her favor. The Realtor provided inaccurate cashflow projections for the commercial property and even guaranteed a fixed monthly income based on those projections. He was making promises to sell the investment.
She proceeded, unaware that she was buying a minority interest and not the 50% promised in writing by her Realtor. Because she was unfamiliar with 1031 exchanges and commercial real estate investing, she placed her full faith and trust in her real estate agent. The result was a financial mess.
Given the complexity of the transaction, the investment might not have occurred — or might have been structured more favorably — had an attorney and a CPA experienced in 1031 exchanges reviewed the documents before closing. During this period, the client did not have a financial adviser, attorney, or CPA knowledgeable in 1031 exchanges to provide oversight and guidance.
Having a team of experienced professionals may seem costly at first, but the value lies in avoiding unforeseen complications through sound advice and expertise.
Check your asset and titles
A different client recently called me after discovering shares of stock still held in her deceased mother’s name. The stock wasn’t highly valuable, but it was significant enough not to ignore.
Before her death, her mother had worked with an estate planning attorney and had both a trust and a will in place. However, she never updated the titling on her investment account, which remained in her name.
Now, years later, my client must open probate in the state where her mother resided at death to address the shares of stock. While this process is not extremely complicated, it is a nuisance. Paperwork must be filed with the court, and attorney’s fees must be paid to resolve this matter.
This issue could have been avoided if the investment account had been retitled to the trust when the estate planning documents were prepared.
It is good practice to review the titling of your assets annually.
Confirm that your assets are titled correctly to save time and money in the future by avoiding probate and court involvement in distributing your assets. Don’t assume your attorney changed the titles on your accounts; this is not something an attorney can do for you. You personally need to update the titles on your financial accounts and certain other assets.
With proper planning and attention to the details of your estate, you can save yourself, your family, and your heirs time, money, and stress by avoiding financial disasters that are difficult to resolve. Remember, even the smallest, most easily overlooked detail can lead to the most complicated problems. When it comes to personal finance, no detail is too small to identify and address.
Teri Parker is a certified financial planner and vice president for the Riverside office of CAPTRUST Financial Advisors. She has practiced financial planning and investment management since 2000. Contact her via email at Teri.parker@captrust.com.