With the end of 2018 approaching fast, and much of our time until the new year arrives, occupied with work functions, family gatherings, and holiday activities, it’s natural to let those outstanding items from your financial plan fade into the back of your mind for a little while. Partly due to this end-of-year repose, as well as a natural rhythm of resolution in the coming new year, we find that clients are eager to get things going again in January, and pick up the threads of those overlooked planning tasks which did not get completed before the end of the year.
One of the biggest holes we tend to see in people’s financial plans, and consequently, one of the topics we are asked most frequently about, is the area of estate planning. It’s astonishing how many clients we see come in without any sort of estate planning documents in place, despite the fact that many of them have developed extremely complicated financial portfolios and amassed significant assets through the years.
Estate planning can be utilized for both basic financial functions and incredibly complex ones, depending on the circumstances, which is why it is always recommended that clients utilize the services of a qualified estate planning attorney. For the purposes of this article, though, we are going to focus on the topics that just about everyone can and should address within their own estate plan.
So, to get the jump on the New Year’s rush, here are the six things every basic estate plan should address:
Last Will and Testament
This one seems like a no-brainer, right? Well it is, and that’s why it is staggering that so many people are without one. Basically, the last will and testament is a way to direct who will inherit your assets, make your post-death wishes known to your loved ones, designate the person who will handle your affairs, and who will care for your children in the event that both parents pre-decease them. It is the most basic piece of an estate plan, but one which, if not in place at the time of your death, causes all of those decisions to be determined by the intestate laws of your state. Each state has its own set of laws or statutes which, in the absence of a last will and testament, determine who gets what, and who takes care of your children, which most of us would undoubtedly rather decide for ourselves.
Guardianships for Minor Children
Determining who will care for your minor children in the event that both parents or primary caregivers pass away, is an extremely important, and personal decision for every family. We all hope that things will never come to this, but life is unpredictable, so it is crucial to have this laid out beforehand, to ensure that, again, the state is not determining who will care for your children after you’re gone. This step is usually completed within the last will and testament, and though the conversations between spouses or partners can be difficult, because they do not always agree about whom they want to appoint for this particular contingency, it needs to be addressed for those with minor children.
Power of Attorney for Finances and Health Care
A power of attorney gives someone you choose the power to act in your place, in case you ever become mentally incapacitated. With a valid power of attorney, the trusted person you name will be legally permitted to take care of important matters for you – for example, paying your bills, managing your investments, or directing your medical care – if you are unable to do so yourself. Without these powers in effect, your loved ones might have to go to court to be granted the authority to handle your affairs in the event something happens to you. Generally, these are two separate documents, a power of attorney for finances, and a power of attorney for health care, but, despite their relative simplicity, they can be immensely helpful in times of crisis, particularly for the loved ones who are trying to help manage your affairs.
A living trust is a written legal document through which your assets are placed into a trust for your benefit during your lifetime and then transferred to designated beneficiaries at your death by your chosen representative, called a “successor trustee.” While it shares some characteristics with a will, it has some very specific differences. Because of this, not everyone necessarily needs a living trust, it depends on your circumstances and wishes.
The first key difference between a trust and a will is that a trust avoids probate – the court proceedings through which your assets are distributed according to your wishes by the executor named in your will. With only a valid will in place, your estate will have to go through probate. Since a trust does not go through probate, this often means a faster distribution of assets to your heirs—from months or even years with a will, down to just weeks with a living trust. Your successor trustee will pay your debts and distribute your assets according to your instructions. Notably, both documents allow you to choose a guardian for your children in the event of your death.
Another difference is one of privacy. Because probate is a public process, it provides very little privacy in the distribution of your estate, whereas a trust is not made public, so how your estate will be distributed remains a private matter.
Living trusts are also utilized to shield, or more often, delay estate taxes. Marital trusts, which take advantage of the unlimited ability of spouses to transfer assets to one another without triggering estate taxes, have been used quite frequently and effectively in the past, by even modest-sized estates. With the increase in the estate tax exemption in the most recent tax bill to north of $11million for a married couple, this is becoming less of an issue, though high-net-worth individuals and families still routinely use these and other trust documents to avoid and defer estate taxes. As such, it is worth discussing the potential benefits and features with your estate planning attorney, regardless of your current net worth.
Finally, a living trust allows you the flexibility to ‘rule from beyond the grave’. With a will, you can stipulate who is to inherit your assets when you pass, but there is little room to put conditions on that inheritance, should you wish to. Let’s say you would like to leave some money to a niece, but she has had issues as a spend-thrift in the past, and you’re concerned that just leaving her a chunk of money all at once might do more harm than good. Because a trust is a legal entity, it provides much more flexibility when it comes to how your assets are actually distributed. For example, you could stipulate that only a certain amount be paid out right away, and that more will be paid out at certain intervals, such as the attainment of specific ages. The possibilities are almost endless, and many people like the idea of having a higher level of control over the manner in which their assets are ultimately distributed.
It is always a good idea to periodically review the beneficiary designations on all of your retirement accounts, to make sure that they are as you want them. It is especially important to review them after you have had estate planning work completed. Many people think that once they have had a will or a trust drafted, all of their assets are covered by those documents. However, most retirement accounts, such as 401(K)s or IRAs, are not covered by your estate planning documents, and require a separate designation for disposition after your death. Attorneys will generally provide language as to exactly how you should list your beneficiary designations for retirement accounts once your estate planning work is done, but it’s vital that you complete the process by actually updating those designations.
The final essential item for most basic state plans is not one which the attorney can always help with, and that is organizing all of your estate planning materials. I know from my own experience that just having a plan in place doesn’t mean your loved ones know how to access the documents or understand what work you may have actually done. That’s why it is essential that all of your estate planning documents are located in one accessible place, and that your loved ones know where to find them. Many people are reluctant to have these conversations with their loved ones either because they can be uncomfortable conversations to have, or they may not want their heirs to know exactly how they’ve set up their plans, but I can tell you from experience that having these conversations in advance can save an immense amount of grief for them down the line.
While the above list is by no means comprehensive, and, depending on the means and intentions of each individual or family, more might be achieved through complex estate planning, for most of us, taking these few steps, will not only go a long way towards shoring up our family’s financial concerns, but also make the handling of our final affairs a much less arduous task for our loved ones when the time comes.