Navigating Life’s Financial Storms

by Daryl Dagit, Savant Capital Management

You wake up to a normal Midwest snow, and your spouse or significant other is out shoveling the driveway as you make coffee. Next thing you know, your partner is lying on the ground after suffering a heart attack. You will never be emotionally prepared for this, but are you financially prepared? Navigating life’s critical financial events, such as the death of a spouse, can be extremely difficult. Advance planning and preparation can help soften the blow when an unexpected life event such as this occurs.

In Illinois, if you die intestate (without leaving a will), the State of Illinois will decide how to distribute your assets. In the case of a spouse with children, the spouse would receive half of the estate, and the children would split the other half. Can you imagine surviving on half of your assets after losing your spouse? What happens if you are not married, but living with a significant other and have no will? In Illinois, the children would inherit everything unless your parents are still alive. In that case, they would receive an equal share along with your children. If only one parent is surviving, that parent would receive a double share, leaving your partner with nothing.

There is good news, though: You can control where your assets will go after your death. As any financial planner will tell you, you should have at minimum a will or trust, durable power of attorney (healthcare and property), and an advanced medical directive. Let’s look at the ways you can pass assets to loved ones and their order of precedence.

Joint Ownership
Joint ownership of property can trump the will and trust. Never assume that just because it is in the will, it will go where you want. There are three common types of joint ownership:

  1. Joint tenancy with rights of survivorship. Upon death, the owner’s share goes to the other joint owner(s). Caution needs to be taken on adding children as a joint owner for liability and tax purposes. They could lose the stepped-up cost basis on certain property, and their liabilities can affect you. Ever hear about the mother who added her daughter to the house, and then the daughter got divorced and the ex-son in law got half of her house?
  2. Tenancy in common. Upon death, each owner’s share goes to his/her heirs or beneficiaries. Special care needs to be taken, as each owner may or may not own the same percentage of the property, and each owner may do as he wishes with his interest in the property, such as sell it, give it away or mortgage it.
  3. Tenancy by the entirety. When one spouse dies, the other still owns the entire property. This provides protection to real property owned by married couples. One spouse cannot mortgage, transfer or deal the property in any way that could affect the rights of the other spouse without the other spouse’s consent.

This applies to assets that allow for a direct beneficiary, such as annuities, IRAs, 403(b) plans, 401(k) plans, 457 plans, Roth IRAs and life insurance proceeds. Review these annually and make sure the beneficiaries are set up the way you want.

There is a special way to handle brokerage and bank accounts by adding a TOD (transfer on death) or POD (payable on death) clause that is similar to a beneficiary designation. If you wish to add a child to an account, this would be the preferred method, as they would have access to the funds at your death.

Will or Trust
The will and trust normally take a back seat to the titling of the asset and the beneficiary listed on the asset. The will and trust will “catch” any assets that are not titled or lack a beneficiary.

As this year comes to a close and a new one approaches, set a resolution for yourself to ensure your financial health is in good order. Nothing can prevent the unexpected from happening, but a well-organized and up-to-date plan can ease the burden placed on loved ones during difficult times. iBi

Daryl Dagit, CFP, CRPS, CEP is the market manager and financial advisor in the Peoria office of Savant Capital Management. He can be reached at (309) 693-0300.