What Should I Consider For My Estate Plan?
Creating an estate plan is something most people brush off because they think “I don’t have the kind of money necessary to create an estate plan”. Well, I’m here to say that’s absolutely wrong. Every adult is in need of an estate plan. Now how complex or simple that is will depend on the kind of assets one owns. The following will cover a brief overview of major considerations regarding estate planning. None of this is considered legal advice and you should seek legal counsel for questions regarding your specific situation.
Here are the two most common financial instruments people have and what they need to consider with regards to their estate plan:
Financial Assets
Most people have financial assets and those pass via contract with the financial company to a beneficiary (e.g. spouse, children, friends, charity). So, be sure to review your beneficiaries (and contingent beneficiaries i.e. those who would receive the asset if the primary beneficiary is no longer alive) on your 401(k), IRA, brokerage accounts, etc. Most banks will also have a payable on death option where you can name an inheritor of those assets. Note, this needs to be reviewed on each account. If you have three 401(k) and two IRA’s, that means you have 5 beneficiary spots you need to input information.
Life Insurance
Again, this passes through contract with the insurance company. If you don’t have life insurance, then you should consider the need, especially if someone else is relying on your income. I think it’s best to discuss with a CFP® the need and amount of life insurance. If you go directly to a life insurance company or life insurance salesperson, they can help you, but knowing how much and what types of policies to buy can get tricky when they are selling a product. Too many people get wrapped into whole life insurance policies and they are often not a fit but happen to pay the insurance company the best. Term insurance is often a better choice (albeit not always, it’s case by case). Your employer may offer you a policy as well, so be sure to look into it. But know if you leave your job, you’ll likely lose that policy (or it will be too expensive to keep).
Even with the type of assets listed above, it can be hard to wrap your head around how all this works. It’s helpful to work with your financial planner who can help map out how your money will flow when you're gone. Below is a simple example of how I illustrate this with my:
Moving past financial accounts and into other items, I highly recommend someone engages an estate planning attorney to discuss the following topics and how they impact your specific situation. There are plenty of online resources to help draft a will or trust, but I would argue it’s best to have a conversation to fully understand the implications of what you’re doing. Software doesn’t always provide that. Yes, you will pay more, but you’re likely getting much more value for your dollars with a person vs software only.
Titling of property
As you're buying real property (homes, land, cars, etc), you may want to consider how you're titling those assets and what state specific implications come with it. For example, a married couple might utilize joint with right of survivorship (or community property if available) so that when one spouse passes, the other automatically has 100% of the asset.
Will
Even if you own very few real assets, the probate process is a pain and lengthy. A will outlines how you want your property to be handled when you’re gone (disposition of assets) and who will be responsible for distributing it (executor). You may say the house is to be sold and proceeds divided up equally among your kids, car one goes to a grandkid, car two goes a friend down the street, the necklace from your grandmother goes to your oldest daughter, etc. Make sure you communicate with someone where the ORIGINAL is. Photo copies are hard to use in the process.
Trusts
Many people think this is only necessary for large sums of money, but that’s not always the case. Trusts can be beneficial in helping your heirs protect the assets they receive from you or to potentially skip the probate process. They can help protect your heirs from their creditors, limit distribution amounts, and more. You can even have other people serve as trustee (responsible for running and managing the trust) if you want additional oversight. For example, my wife and I have a testamentary trust created upon our passing for the benefit of our child. We have set disbursement periods over life should we pass early (because we’ve all spent money in our 20’s we wish we hadn’t) and appointed a close friend (and fellow financial planner) to serve as trustee. There are many kinds of trusts and an attorney is the one who should assist and create the trust that’s needed for your situation.
Medical Power of Attorney
If you become incapacitated, you may want someone to be able to make decisions on your behalf that you trust from a medical perspective. This document will assist in that process and make it easier.
Advanced Medical Directive
No one likes to talk about end of life, but there can be some scenarios that you want to be a bit more “in control of”. This document will outline your wishes for the catastrophic scenarios that may play out, such as being on life support.
Power of Attorney
This is a very powerful document that needs thorough consideration of who holds this power. This person will be able to act as you in most matters. There are versions that become active immediately and continue if you’re incapacitated (durable) and versions that only come into play if you’re incapacitated (springing).
Guardianship
If you have minor children, this is a must as it names who you want to take care of your kids upon your passing. Be sure to have a conversation with those who you designate beforehand. You probably don’t want the court system making the determination of who should take care of your kids should you pass.
HIPPA Authorization
If there is ever a need to obtain medical records and you’re unable to do so, naming another to do this in your stead can be handy under certain circumstances.
Finally, I would recommend you keep an original copy of all documents in a very safe and secure place (fireproof safe or safety deposit box). I would also recommend providing a copy to your financial advisor, attorney, a close friend or family member so they can help if/when the time comes.
An estate plan is a critical step in the financial planning process that your advisor should be discussing with you. Many things can be fixed over time when it comes to your finances, however nothing can undo your passing away and what you have set-up at that point. Be intentional with what you have and set your loved ones up for success in dealing with your affairs in a difficult time.
If you’d like to discuss your estate planning needs, click the Schedule Appointment button at the top of the page. I’m happy to get the conversation going and bring in trusted resources to help get your full estate plan in motion!