We can demonstrate the importance of estate planning by comparing two estates with different approaches to estate planning. On one side of the continuum, we have an individual who has assets but no estate planning. On the other end of the continuum, we’ll have someone who has assets of the exact same nature, but they do have a well-thought-out nor properly drafted estate plan.
In the first example, the individual had an IRA, a 401(k) plan, and they were a partner in a closely held business. They own 50% of a business and there’s no buy/sell agreement between the owners of the business and the deceased individual. Other assets he may own include checking accounts, some with rights of survivorship with the spouse and some without. All of these assets would go through probate at the time of their death.
Probate is a court-supervised process by which the assets of a deceased person are distributed to their heirs at law. Heirs are distinguishable from beneficiaries, in that the individual designates a beneficiary whereas an heir is an heir under the statutes of North Carolina. These statutes determine who will get your property, assuming there is no estate plan in place.
In example number one, assuming there is a surviving spouse, the surviving spouse will get the first $60,000 of the deceased’s personal property. Personal property includes cash, vehicles, jewelry, and other household items. Personal property does not include real estate, nor assets that have a designated beneficiary. The remainder of that property is going to be divided between the surviving spouse and the children of the deceased; not necessarily in the proportion that the descendent would have wanted the surviving spouse to receive.
As far as the closely held business is concerned, it needs to be valued. Every single asset needs a valuation, and you must report it to the court. This requires engaging a qualified valuation expert to come in and value the business, then get into a negotiation with the other shareholders or partners to determine what a fair market value equals for the deceased partner’s interest in the business.
The surviving spouse will always think that the business is worth more than the surviving partners. Surviving partners want to pay the surviving spouse as little as possible, preferably nothing. The surviving spouse wants to get the most money she possibly can out of that closely held business. In North Carolina, it is possible to accidentally, in part or whole, disinherit your spouse by not having a good estate plan in place.
Let’s contrast that with the other side of the continuum where someone has proper estate planning.
In scenario two, they ideally have, at a minimum, a trust that has been funded during their lifetime. Everything that’s in the trust will avoid probate. Those assets that are not in the trust that are properly titled and have proper beneficiary designations will also pass outside of probate. In a perfect world, the only thing that’s going to pass through probate will be perhaps a motor vehicle—an asset, I do not recommend putting in a trust for various reasons.
Other assets, like life insurance, IRA, and 401(k)s, will pass to designated beneficiaries outside of probate as well. A closely held business should be addressed during the lifetime of the owner of the business or the co-owner of the business. There should be an agreement with specific methods described within discussing how the remaining owners of the business are going to buy out the surviving spouse. It could be through a buy/ sell agreement, funded with insurance, where the other shareholders have a life insurance policy on the others and at the death of one of the partners, the life insurance has been used to pay the surviving spouse to buy out of the deceased spouse’s interest in the business.
These are things that you really cannot do yourself. These are complicated corporate and business governance issues that a qualified attorney needs to work on. That falls within the scope of what our firm does with estate planning. It’s again not something that you might think of being estate planning but in fact, it really is.
For more information on Estate Planning Law in North Carolina, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (704) 997-9322 today.