The Importance of an Estate Plan
Not having an estate plan can cause confusion about your end-of-life wishes. It also puts a lot of undue emotional stress on your family.
If you die without a will, the laws of your state will determine the fate of your minor children and assets. Assets may not end up being distributed the way you’d like. And, if you’re incapacitated, the choices made about your medical care may not be those you would want.
Estate planning can save you from all those unfortunate outcomes.
Not only does proper estate planning put you in charge of your finances, it can also spare your loved ones of the expense, delay, and frustration associated with managing your affairs in court when you pass away or become disabled. It’s best to make plans before you need them—and should disability, illness, injury, or unexpected tragedy announce itself tomorrow, you’ll be prepared.
Even after you’ve put together an estate plan, you should review it from time to time based on changes in your life. Check at least once every five years. Heirs may have remarried, or the person you chose to administer your estate may have passed away. If you marry or divorce, you should review your estate plan again.
Here are 10 of our top tips to create a basic estate plan.
1. Assemble your estate planning team
Nobody wants to think about worst-case scenarios. However, establishing an estate plan is a key step to take to protect yourself and your loved ones. In this case, spending a little time to get all your affairs in order is one of the best parting gifts you can give to your family.
At the very minimum, your Estate Planning Team includes your Financial Advisor, Tax Professional, and Estate Planning Attorney. Your Estate Planning Team will help you prepare a comprehensive estate plan that reflects your goals, desires, and unique family circumstances. Each person plays a critical role in the process with the ultimate goal of ensuring your assets are distributed properly upon your passing.
2. Document your wishes
Toward the end of your life, illness and disability may take things out of our control. However, there are some things we can control:
- Giving our loved ones the authority to speak with our health care team and make decisions on our behalf
- Allocating our assets to the proper individuals and organizations
- Naming a guardian for our minor children
- Sharing our thoughts and values with our loved ones in order to make it a little easier if they have to face unthinkable choices
Your estate plan will clearly spell out how you want to distribute your probate assets and possessions upon your death. Without it, the state may make those decisions for you.
Components of Your Estate Plan
Medical Power of Attorney (Medical POA or Health POA)
Your Medical POA is legal document you use to name an agent and give them the authority to make health decisions for you if you are unable.
Financial Power of Attorney (Financial POA or Durable POA)
Your Financial POA is written specifically to allow someone to manage your financial affairs if you are unable. It’s usually created alongside your will. You can limit it to certain functions or make it all-encompassing. Or, you opt for a springing power of attorney, which only takes effect if a doctor declares you incapacitated.
Living Will (Advance Directive)
Your living will provides clear guidance about what treatments you do and do not want if you are unable to speak for yourself.
Would you want to be kept alive with a ventilator or a feeding tube? If so, under what circumstances would it be okay to take you off life support?
Have these hard discussions with your family and with whoever has your medical POA so that when the time comes, they will understand your wishes.
Your will allows you to name guardians for your minor children. It also designates where your assets outside of a trust (like your car, your HSA, your bank accounts, or your personal possessions) will be distributed.
Your living trust is essentially an extension of you as a person. You need a living trust for two major reasons:
- It allows you to pass on assets without going through the public probate process.
- It permits an appointed person to manage your affairs should you become incapacitated.
You can hold all kinds of assets in your trust, including your house, your car, and your bank accounts. Of course, you can designate yourself as the trustee—but you can also make someone else a successor trustee who will take over when you can’t manage your own affairs.
HIPAA Authorization Form
The Health Insurance Portability and Accountability Act (HIPAA) is a federal law designed to prevent disclosure of sensitive patient health information. With a signed HIPAA authorization form, you’ll authorize your health provider to disclose information to specific people.
These documents will help you and your family avoid significant disruptions in your financial life.
3. Set up guardianship for dependents
Do you have children under 18, or any other dependents, such as a sibling with special needs? You’ll need to name a guardian to look after them after your death. If you don’t, a judge will appoint one for you.
While the choice of a legal guardian is highly personal, there are some considerations that everyone should think about:
- Name every minor child in your will. Make sure every child is provided for individually in your will—the court won’t automatically grant custody of all of them to the same legal guardian.
- Specify living arrangements. If you want your children to stay together, specify this in your will. If this factor is more important to you than the legal guardian, say so. In the event that your chosen guardian cannot serve but you’d still prefer your children to stay together with a different guardian as named by the court, make this clear in your will.
- Consider family dynamics. Is your chosen guardian in the position to care for all of your children, emotionally and financially? Do they have other children as well? How will the kids get along?
- Specify whether you'd like your children to be raised in a two-person home. If, say, you’d like your children to be raised by your brother and sister-in-law, name each member of the couple as a co-guardian. (However, naming a couple as co-guardians could get tricky if the couple divorces. Talk to your estate planning attorney about how to prepare for this.)
- Consider your guardian’s age and lifestyle. Many people default to naming their own parents to be guardians of their children, but try to be thoughtful about their age and general health, especially if you have younger children.
- Consider your guardian’s personal and religious values. You’d probably prefer a guardian who shares your basic values and goals as a parent so that your children will be raised similarly to the way you would have raised them.
- Consider your guardian’s location. How far away are other family members and important people in your children's lives? Will your children have to deal with moving to a new location in addition to the loss of their parent(s)?
Make sure you and your appointed guardian are on the same page, and that the guardian understands the ramifications of the role.
Don't forget to plan for life insurance payouts and money left for your children.
Remember: Your children’s guardian doesn’t have to be the person managing the money left for your child’s benefit.
Unless you’ve got a very savvy guardian, it’s better to have the money placed in a trust. We all like to think the best of everybody, but it's not uncommon for money not to be used the way it was intended.
4. Set up a trust
Think of a trust as an extension of yourself. It’s designed to hold and protect money and assets. You get to decide what goes into the trust, who gets what, and the terms of distribution. A properly structured trust can help ensure that your plan is executed exactly the way you intended.
For instance, some joint assets pass automatically to the surviving partner upon death. Others may not. Make sure you’re holding title to homes, bank accounts and other possessions the way that will benefit your family.
Whatever you do, work with your estate planning attorney to make clear plans for your house. Of all the things you want to pass on to your heirs, your home is likely the largest and most important!
If you don’t:
... Your kids (or whoever you want to pass the house on to) won’t be given access to your home until the court appoints an executor.
5. Plan for federal and/or state estate taxes
The IRS announced higher estate and gift tax exemptions for 2021:
- $11.7 million per individual, up from $11.58 million in 2020
- $23.4 million per married couple
Most individuals will not exceed that level of wealth, but for those who do, it’s of utmost importance to create a proper estate plan. At the current 40 percent estate tax rate—you’d be losing $400,000 in taxes for every $1,000,000 above $11.7 million!
If you’re in select states, your exemption is much lower. In Oregon, the exemption is a mere $1 million.
Reducing the tax obligation on your estate may include strategies such as legacy giving, or employing an A-B trust. Talk to your Financial Advisor, Tax Professional, and Estate Planning Attorney to determine which estate tax planning strategies may be appropriate for your circumstances.
6. Avoid probate
Probate court serves to verify your will, settle outstanding debts, and distribute assets, investments, business interests and property for the deceased. It’s a costly process that will immediately devalue an estate. Moreover, it can take years to conclude, depending on familial circumstances. And, unfortunately, probated wills are a matter of public record.
In California, if your assets are valued at $150,000 or more and they are not directed to beneficiaries through either a trust plan, beneficiary designation, or a surviving spouse, those assets are required to go through the probate process upon your incapacity or death.
Here are the statutory fees for a probated estate in California:
- 4% of the first $100,000 of the estate
- 3% of the next $100,000
- 2% of the next $800,000
- 1% of the next $9,000,00
- 0.5% of the next $15,000,000
For an estate larger than $25,000,000, the court will determine the fee for the amount that is greater than $25,000,000.
In addition to court fees, there are much more substantial fees—those to pay both the personal representative (i.e. executors, administrators, etc.) and the attorney handling the estate.
How do you spare your family the hassle and expense of probate?
You can ensure the privacy of your estate plan with a revocable living trust in most states. This allows you to appoint a trustee to handle your debts and assets should you become incapacitated or die.
7. Plan for contingencies
They say in life, you should prepare for the unexpected. This is true even after you pass away.
For instance, consider what will happen if your named beneficiary passes away before the time comes to distribute the estate. That’s why it’s good to name several backup trustees, a trusted financial professional, or a financial institution.
In another example, consider what will happen if your named beneficiary somehow becomes incapacitated, such as by addiction or mental illness. It may not be happening now, but it could happen down the road.
Consider the use of a discretionary trust, under which the trustee—a trustworthy, sensible adult—is given full discretionary authority to decide when and what funds (e.g., principal, income) are given to which beneficiaries.
8. Consider long-term care
Suppose that the unthinkable happens, and suddenly, you or your spouse require expensive medical assistance around the clock. This can easily cut into the legacy that you’ve set aside for your heirs.
Talk to your Financial Advisor about helping you prepare for long-term care needs, perhaps with long-term care insurance, to protect your assets and income. Make sure to discuss your options and create several plans to account for illness, injury, and disability.
9. Be aware of Income in Respect of a Decedent (IRD)
The Federal Estate Tax isn’t the only tax that you should watch out for. Income in Respect of a Decedent (IRD) covers income that you would have received had you lived. If you die and you have income that hasn’t yet been taxed, your estate or your beneficiaries will be required to pay income taxes on that money. IRD can be a significant estate planning issue, especially if you have large balances in an IRA or other retirement account—or inherit such assets.
10. Keep your beneficiaries current
When you set up accounts throughout your lifetime, like a 401(k), IRA, annuity, or life insurance policy, you’re prompted to name a beneficiary. When handled properly, beneficiary designations make “after life” easier on your family by avoiding probate.
However, life moves quickly. Circumstances can change drastically in the blink of an eye. People have unintentionally left millions to their ex-spouse because they never changed the beneficiary designations when they divorced or remarried! Not to mention—events like mergers, changing computer systems, or moving from paper to electronic records can result in data mixups.
Review your beneficiary designations on a regular basis. Keep them aligned with your estate plan to eliminate any concern about conflicts. Any money you have in accounts with named beneficiaries will go to those individuals, even if your estate plan says otherwise—including payable-on-death and transfer-on-death accounts.
11. Revisit and revise your estate plan frequently
Especially after any major event affecting your assets, like the sale of your small business, it’s wise to revisit and revise your estate plan.
For instance, let’s say your house is owned by a living trust. If you and your spouse want to refinance your home, some banks may require the home be taken out of the living trust in order to do the refinance. By human error, the property may never be replaced into the trust. That means that your heirs must go through the probate process in order to clear title.
12. Don’t overlook sentimental items
These are the irreplaceable items that are often overlooked in the estate planning process.
It’s important to account for the small, priceless items in your estate plan. Pieces like your grandmother’s engagement ring, your grandfather’s wristwatch, family photo albums and family letters have significant personal value. It is important to plan for heirlooms and family items because they are much more difficult to handle if they go to court.
13. Don’t forget about digital assets
Many of us keep our treasured photos and important documents stowed away on our computers, locked behind long and complicated passwords. Online service providers generally won’t disclose a deceased person’s passwords. If you wish to release access to your digital assets upon your death, designate a “Digital Fiduciary” in your estate plan. Your Digital Fiduciary would have the right to access your digital assets, and can help you remove your online presence.
In order to plan ahead, it’s a good idea to consolidate your accounts over the course of your lifetime. The fewer accounts there are, the easier it will be on your family. For instance, you can start by rolling your retirement accounts into one central IRA.
We Can Help
A well-crafted estate plan is one of the most thoughtful parting gifts you can offer your family. And having your personal property distributed through probate court is a far worse alternative, especially when there’s a house involved.
Fortunately, it’s not too late to ensure your family’s needs and your wishes are met. If you need help putting your estate plan in place, please fill out the form below and we’ll get back to you shortly. We look forward to hearing from you.
DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.