Creating The Foundation Of Your Estate Plan
From our experience working with clients across many different income, net worth, and family situations, aside from taxes, we find that the impact (while both living & after passing away) estate planning can have is vastly overlooked.
Furthermore, it does not matter how old the client is, if they have children, or the level of their net worth, every single client that engages with me needs to be thinking about their estate plan.
Many believe taking action is not necessary because they do not have enough assets, their situation is too simple, or because taking action in this area is very expensive.
When in reality, the cost of not doing anything can far outweigh the upfront cost to execute these documents if something were to transpire. In addition, some of the options in this area actually protect families while they are living, versus being perceived as only useful if someone passes away.
So, in this week’s blog I will review the basic documents folks should be aware of, why they are important, and how decisions made within your estate documents can greatly affect your investment, tax, and life planning.
Basic Documents
While, I am not an attorney, nor do I claim to be one, within my planning process I make it a point to review with clients the meaning and purpose of Wills, Medical Directives (healthcare proxies), and Powers of Attorney (financial powers). In addition, we review current beneficiary designations listed on retirement accounts, investment accounts, and bank accounts.
These types of documents are extremely important to have on hand when a catastrophic event transpires, and decisions need to be made:
- Beneficiary Designations: The person(s) listed are who will receive the assets upon your passing. Usually, a spouse is listed as a primary beneficiary (first), if this spouse is deceased at the time of the account owners passing, the contingent beneficiaries will kick in (second in line)
- This election is called a ‘Transfer on Death Registration’ (TOD) on a taxable investment account (non-retirement)
- For bank accounts, this is commonly called a ‘Payable on Death Registration’ (POD)
- Last Will & Testament: This document states your final wishes upon your passing. It will also list where the assets left in your estate will go. For young parents, this is also where you elect who will be the guardian of your children (typically in the event both spouses pass away)
- This is where you list the executor / executrix of your estate
- This is the person who facilitates / manages the disbursement of your estate through the probate process
- Duties could include satisfying unpaid bills, taxes, debts, and of course following the distribution instructions within the Will
- Financial Power of Attorney: Within this form you assign an individual(s) the power to make financial or legal decisions on your behalf, if you are not able to.
- Healthcare Proxy (Directive): Similar to the above, this allows you to name an individual(s) who can make medical decisions on your behalf if you are not able to
- This document is sometimes confused with the Living Will (part of the advance directive) – which is a form that allows a person to make decisions concerning your end-of-life health decisions if you are not able to make them on your own
Revocable & Irrevocable Trusts
Once the basics are in place, sometimes it does make sense to dive into the role Trusts could have in one’s estate plan. With that said, in general there are two types of Trusts – Revocable & Irrevocable. It is EXTREMELY important to understand the difference between the two.
Essentially, a Revocable Trust is changeable as long as the Trustees are alive. They are also referred to as Revocable Living Trusts. This type of vehicle could make sense if more privacy is preferred, you are aiming to avoid probate, or if you would like to have ‘control from beyond the grave’ in regard to who receives assets and when they receive them. If you have minor children, this type of vehicle could be applicable.
An Irrevocable Trust is the complete opposite, as putting assets in this type of Trust requires you to give up ownership of the assets, and as a result, you give up complete control of the assets in this Trust. The Trust cannot be changed once they are executed (aside from a few special circumstances). Most commonly, these types of Trusts are used to transfer wealth to future generations with a goal of minimizing estate and gift taxes. They are very complex vehicles – you should always consult with a qualified estate planning attorney before taking any action in this area.
As you digest the above, my hope is that this painted a clearer picture of what actually goes into establishing a basic estate plan. While everyone’s actual estate plan is very different, the above documents are designed to remove the thinking from these very difficult decisions at the time a loved one is passing away (or has passed away).
These types of scenarios are energy draining as it is, therefore adding another layer of administrative / health decisions can truly push family members and care givers over the edge.
So, getting these basic elections put in place takes the burden off of both the individual who is suffering, and their associated family members.