Financial Foundations #3 - Your Estate Plan
What is estate planning?
Estate planning is making a plan for who gets your assets when you die, so it goes to the right people with as little legal hassle as possible. It also encompasses the planning for incapacity (where you can’t make decisions for yourself), which is not limited to an age, as well as guardianship if you have minor children.
Why do you need it?
If you don’t have an estate plan in place, you leave lots of important decisions to be made potentially by people who don't know what you’d really want to happen. The primary way we’ve seen this play out is when a person dies without a will. Your estate will enter the probate process, which is public, and that can take months to complete (sometimes 6-12 months+!!). The court typically steps in and appoints someone to administer your assets and distribute as they see fit. That can be a big problem if that person has no clue how you want your assets distributed or any of your final wishes. When it comes to the financial planning process, there are many things that we can address later, but we can’t undo someone dying and therefore think it’s important to tackle your estate plan as soon as you are able.
What should you consider in it?
There a variety of people and documents that you should consider in your estate plan, including:
Beneficiary elections - for financial accounts (bank, investment, retirement accounts) and life insurance policies, you can name who you want as your primary beneficiary (or beneficiaries) and contingent beneficiaries - those that would be next in line if something happened to your primary beneficiary. The great thing about naming a beneficiary is that it can pass to that person immediately and not go through the probate process.
There are two primary types of beneficiary designations: per capita (by the head) and per stirpes (by the branch). Per stirpes follows the family line if the original intended beneficiary is deceased. Per capita would redistribute that share amongst the rest of the surviving beneficiaries. We recommend you review all financial accounts to make sure you understand to whom and how they will pass to your heirs.
Last Will and Testament - This is the document that indicates who will carry out your final wishes and describes what those wishes are. It may also include how to distribute assets and who will care for minor children.
Trust - This is a legal entity that holds and manages assets. One benefit of a trust is that if a trust holds the assets, it avoids probate on them and keeps your matters private. Additionally, you can name trustees (people to oversee the assets) and beneficiaries (those who benefit from the assets). However, there is a cost to create a trust and taxation of a trust can get expensive quickly. There a few common types of trust:
Testamentary - this is a trust that’s created upon your death by your will.
Revocable - this is a trust that you create while you’re alive and you can add and remove assets from it at any time for your use. This kind of trust is pretty flexible and easy to change while you’re alive.
Irrevocable - this is trust that you also create while you’re alive and once you put assets in, you can’t pull them back to your name. This is permanent in nature.
Power of Attorney - this document allows someone to operate as you, in the event you’re incapacitated. This can be specific or broad, but typically lists common ways they can engage. Note, incapacitation can happen at any age. Once you pass, this document is no longer valid.
Durable - this kind of power of attorney stays in effect as long as you’re alive and even if you’re incapacitated.
Non-Durable - this kind ceases at death or incapacity.
Medical Power of Attorney - This allows someone to make medical decisions on your behalf if you’re incapacitated on procedures or steps to take.
Guardianship - this may be covered in your will or a stand alone document. Essentially, you can (and should) name someone to care for your minor children should you pass before they are age 18. Otherwise, the court will make this decision.
Living Will or Advanced Medical Directive - if you have specific end of life requests, such as a do not resuscitate or you do not wish to be on a ventilator, this document can outline those requests for medical professionals. If you have strong feelings about these topics one way or another, it can certainly provide relief to your loved ones as they aren’t stuck making those decisions and second guessing themselves.
How do you put an estate plan in place?
The best way to get this done is by visiting with an estate planning attorney. You’ll be able to sit down, compile a complete inventory of your assets and describe your wishes, restrictions, exclusions, etc. to them so they can draft the documents to meet your specific needs. We highly suggest this option so you can discuss and ask questions that are specific to your situation and get the best advice possible.
Some companies provide a legal benefit where you can utilize a network and select an attorney to help you draft these documents. These legal plans are typically free or low cost and can be a great way to knock these out.
For those of you that like to DIY, you can use online services that can help you draft the documents and then you’ll just need to sign them in front of a notary or witnesses.
How often should I revisit my estate plan?
We think your estate plan is worth a full review every two years. People change, circumstances change, and views change. By reviewing systematically, it keeps the process top of mind so you can best care for those that are important to you.
Next up, we’ll discuss risk planning, which involves a variety of insurance policies that may be applicable to you.
Check out other Financial Foundations topics: