Could Your Heirs or Beneficiaries Receive a Smaller Inheritance Than You Thought?

Most people don’t look forward to the death of a loved one, but they may have thought about a possible future inheritance.

The reality is, that when someone passes, one of the first things heirs and beneficiaries want to know is the overall value of the deceased’s estate. Generally, the executor or trustee is required to share that information with the beneficiaries, which may send each heir’s mind spinning about their own piece of the pie, maybe even deciding what they’re going to do with that money in their mind. This thought process can be dangerous and set people up for disappointment. What those individuals may not know is that the estate is also in charge of settling a number of expenses before the remaining assets are parsed out. These costs can cause the final amount to be significantly different than what the beneficiary had in mind or was counting on.

Here are a few things that may cause the final value of your estate to be lower than you might think.

Creditor Claims.

The executor or trustee is in charge of determining whether the deceased has any outstanding debts, and it’s their duty to have these debts paid out of the estate first. Sometimes this means a thorough search through the deceased’s records, calling banks and creditors to determine any outstanding balances. This search may include banks, mortgage lenders, medical providers, credit card companies, hospitals and more.

It’s also common practice for the executor to give notice of the estate’s proceedings in an appropriate newspaper or legal publication to notify unknown creditors that they must present any claims within a certain amount of time or be barred from presenting them any time in the future. The executor also has the duty to determine which creditor claims are valid. Sometimes they will need to challenge or even litigate certain claims in court. This carries its own cost, sometimes a cost that outweighs the amount of the original claim – all of which will impact the final amount distributed to beneficiaries. It’s even possible that depending on the number of creditors and the amounts owed, an estate may run out of money during the course of administration, leaving nothing to the heirs of the estate or beneficiaries of the trust.

Estate Expenses. 

In addition to creditor claims, an estate must often pay administration expenses. Listed below are the most common estate expenses:

  • burial and funeral expenses
  • tax preparation fees
  • property appraisal fees
  • expenses related to storing and shipping personal property to heirs or beneficiaries
  • expenses related to home repairs and improvements to prepare real property for sale
  • maintenance costs for real and personal property during administration of the estate or trust
  • attorney fees
  • trustee or executor fees
  • probate court fees

Depending on the size of the estate and the types of accounts and properties held by it, these expenses can make a significant dent in the final amount available for distribution.

The good news is that some of these fees and expenses can be reduced or removed with good estate planning beforehand. For example, using a fully funded revocable living trust as the deceased’s primary estate planning tool usually avoids the need for probate of an estate, which can reduce attorney fees and court costs significantly. However, professionals like attorneys and property appraisers may be needed even if the estate doesn’t go through probate, but that involvement should be significantly reduced by avoiding probate.

Litigation Expenses.

Strife and disagreement between family members is one of the most detrimental things to the amount of money and property ultimately available for distribution.  If disagreements can’t be resolved through mediation or negotiation, tensions can flare, family members may bring in attorneys, and long, drawn-out court battles can ensue. In these cases, the legal fees can far exceed the value of the estate quite quickly. In many cases, the terms of the estate plan will authorize the executor or trustee to use funds from the estate itself to pay for any defense needed against attacks by the heirs or beneficiaries. When this happens, even heirs or beneficiaries not involved in a challenge or contest can end up with far less than they might have expected. But that approach may also cause beneficiaries to hit pause before moving forward with legal action, knowing that the costs involved will only continue to decrease their overall portion of the estate.

Those are ways your beneficiaries may receive less money, but here are several ways to maximize the amount of money and property ultimately available for your heirs or beneficiaries:

  • Purchase enough life insurance to cover your total debts, so that your executor can quickly and easily pay off any creditors upon your death.
  • Use non-probate methods for distributing your assets such as trusts and, when appropriate, beneficiary designations.
  • Either alone or with the help of your attorney, write out a clear set of instructions to those who will be in charge of your final affairs so that they know exactly who your creditors are, which estate documents are the most recent, and who they should contact upon your passing.
  • Talk to your beneficiaries and loved ones about your plans so they know what expect and what your expectations are from them. Making your wishes known while you’re still alive can help ease tensions after your passing.
  • Work to resolve disputes between loved ones while you are still alive rather than leaving things to chance during the winding down of your affairs and administration of your estate or trust.
  • Clearly specify in your legal documents who will get what so that it is crystal clear to everyone.
  • Consider making funeral arrangements and purchasing a prepaid funeral plan before you die. This way the costs of your burial do not impact the final amount of your estate.
  • Work closely with your attorney to make sure your trust is funded properly and that your other estate planning documents are up to date and clearly reflect your wishes.

 

Good estate planning today can have a significant impact on how much money or property your loved ones end up with, but it is important to set expectations. Not all expenses can be avoided and your loved ones need to understand that they shouldn’t count their chickens before they hatch. Mentally spending money they have yet to inherit can cause deep disappointment or even financial disaster if they make decisions based on money they believe they will be receiving.

We can help

At Davis Law Group, our experienced estate planning attorneys are here to assist you and your family to make the wisest decisions for you and your family’s future, while also helping to make sure everyone is on the same page. If you have any questions or would like us to help facilitate this conversation, please give us a call.  We are available for in-person, telephone, or virtual appointments.