When I cover the topic in meetings with clients, I often begin by asking what comes to their mind when they hear “estate planning”. A few will rattle off the names of documents, but the majority respond with what many of us are led to believe when left to our own devices, something like: trust fund… wealthy people… death… my parents…
What do you immediately think of?
Estate Planning is for Everyone
The first thing I’d like to loudly declare is that estate planning is for EVERYONE. Not just the “wealthy”. Not just for those who are older. And it includes decisions that may need to be made while you are alive.
Not entirely convinced you need to create an estate plan? Take a moment to reflect on this [understandably wordy] question…
“If you are no longer able to communicate for yourself, do you have any specific wishes for the type of healthcare treatment you’d receive, how your assets would be managed and distributed, or how your loved ones would be cared for?”
If any part of you thinks “yeah” or “probably”, then you need to create your own estate plan.
What is it that an Estate Plan Does?
Broadly speaking, an estate plan will:
- Appoint trusted individuals to take on specific roles and make decisions according to your wishes when it comes to your healthcare received upon incapacitation, finances, and any minor children.
- Ensure that your belongings and assets are efficiently directed to your loved ones and any organizations according to your guidelines.
Naturally, what it is exactly that makes up an estate plan looks different person-to-person and family-to-family. But again, having the plan – YOUR plan – is essential.
What Happens if I Don’t Make an Estate Plan?
Who will raise your child?
What happens to the house?
Who will take care of your dog?
Who will get your most prized possessions?
Who will get any money you have, after debts and taxes are paid?
Who will make important medical decisions if you become incapacitated?
Who will be in charge of making sure everything gets distributed to your loved ones?
These are just a handful of the many questions that have to be answered at some point. They can either be answered exactly the way you want them to be. Or, in the absence of your plan, the court system in your state will handle it their way.
Probate… What is it?
The “probate court” is the portion of the state legal system that manages a person’s affairs upon their passing or even incapacitation. This process is usually referred to simply as “probate”, which can take time and, in some cases, come with a substantial cost. While each state has its own set of rules governing the proceedings, it generally involves facilitating the payment of any debts owed and then the distribution of any remaining assets based on the wishes set out in a will (if there is one).
Importantly, if you don’t have a will, the court will distribute any property and assets according to the laws of that state (though many assets can circumvent this process by simply naming a beneficiary – see below). Similarly, the court will determine any guardianship needs. It goes without saying that your wishes for who makes key decisions, who gets what, and who cares for whom may differ from what the state would decide… thus the importance of proper planning!
I trust you’re starting to pick up what I’m putting down here...
You already have an estate plan, whether you like it or not, even if you never sat down to make one. Because, ultimately, the decisions will be made by someone. It’s just a matter of how much control you want to have over the “who”, “what”, and “when” of it all.
So how do you maximize that control?
The Easiest First Steps
#1 Beneficiaries
Beneficiary designations are a fundamental part of any estate plan and something most people have already taken care of to some degree!
Some nice things about beneficiary designations:
- It doesn’t cost anything to make them
- Very easy to name them and make updates
- They have priority over what any other legal documents might say
- You don’t have to worry about the probate court getting involved here – the money passes directly to the appropriate person or entity
Given the gravity of beneficiaries, we recommend reviewing them regularly.
You’ll want to be certain that they’re listed properly on all…
- Life insurance policies (both workplace and personal)
- Retirement and other investment accounts
- Bank accounts and CDs
A few tips:
- Make sure to list both primary and secondary beneficiaries.
- Be mindful that it may be referred to as a “Payable on Death (POD)” designation for bank accounts and/or CDs, and potentially a “Transfer on Death (TOD)” designation for some brokerage accounts.
- Tread carefully if naming a minor as beneficiary on life insurance or other accounts. This can potentially lead to complications or unwanted outcomes.
#2 Life Insurance
If someone else counts on your ability to earn money, then life insurance is a must! Putting the right coverage in place is the most effective way to ensure your loved ones are taken care of in the event you and your income are no longer here to support them.
For more of our thoughts on how to approach life insurance, read Mike’s post on the subject here.
The Basic Documents – What Everyone Should Have
Regardless of age, family situation, assets, or income, we recommend at least putting the following in place.
Financial Power of Attorney
This is a document that names an individual who will step in and act on your behalf for any financial matters if a time comes when you are not able to do so.
Health Care Power of Attorney
This document grants authority to someone (Health Care Agent) to make medical decisions on your behalf if you become incapacitated or too ill to make them yourself.
Living Will
This lays out specifically what medical treatments or life support you would want (or not want) if you are unable to speak for yourself.
Last Will & Testament
This document (also known simply as a “will”) spells out your wishes for how any belongings and other assets should be distributed. In the will, you will also name some key roles:
- Executor: This person will essentially carry out the wishes expressed in your will.
- Guardian: This is who will care for any minor children.
- Beneficiaries: Individuals or organizations who will receive assets, particularly for non-financial assets (as these will be named on those accounts/policies)
Some Notes…
- It’s possible to have the Financial Agent named in your Financial PoA document be the same person as the Executor listed in the Will, if you feel that would simplify things.
- Think very carefully about who you’d like to assume each role. It’s even a good idea to ask them beforehand if they would be willing to take it on.
Here’s What Else You May Need, Based on Your Situation
If you have everything listed above locked in, then you’re likely in really good shape! The next “tier”, if you will, involves establishing a trust – something that may make sense for some and not be all that necessary for others.
How to know if I might need a trust?
The most common reasons to consider a trust result from the desire to…
- Maintain maximum control over how and when your assets are distributed.
- Keep things out of the public, lengthy, and potentially expensive probate process.
Other, more complex situations that lend themselves to creating a trust may include: owning property in multiple states, planning for a child with special needs, asset protection, and certain charitable giving goals.
What exactly is a trust?
Put simply, it is a legal arrangement that holds and manages your assets for your benefit and the benefit of anyone else you want. There are 3 key roles with a trust:
- Grantor: The person who puts property/assets into the trust. Also called a “settlor” or “trustor”.
- Trustee: This person is responsible for managing the assets within the trust for the benefit of the named beneficiaries, according to the grantor’s instructions.
- Beneficiary: The person, people, or entity who receives the money, property, or income from the trust.
If you establish a “revocable” trust (most common), you’ll more than likely be the Trustee while you’re alive. Then, a named Successor Trustee will take over managing the trust assets upon your incapacitation or death. The Successor Trustee could be the same person as the Financial Agent and Executor, if you wanted.
What is a revocable trust?
Literally, it means you can “revoke” the trust arrangement, and it can be changed during your lifetime (as opposed to an “irrevocable” trust). Revocable trusts are set up while you’re alive, meaning it’s a type of “living trust” (compared to a “testamentary” trust, which takes effect upon the death of the grantor).
What does a trust do that a will can’t?
Probably the most practical benefit of a trust is that it allows you to determine when you want beneficiaries to receive certain assets during their lifetime. For example, with younger children, we often see clients schedule distributions in stages such as: ⅓ at age 25, ⅓ at 30, and ⅓ at 35. Chiefly, you have a lot of control over the resources inside the trust even once you’re no longer around. And again, it allows for assets or property to pass without the probate court getting involved.
Don’t forget!
After the trust is created, it is necessary to actually “fund the trust”! A lot of people hear this and get confused (or worse, don’t do it). All it means is that anything you want to be included in the trust and available as a resource to distribute according to your instructions needs to be structured to allow for that. Specifically, this involves retitling assets so that the trust is the owner.
Some Ways to Get it All Done
Once you’re ready to take action, there are generally a few different paths you could take to actually get the plan done…
- Check your employee benefits: Some employers offer legal services as part of their benefits package. If available, it’s a relatively inexpensive way to engage an estate planning service and get your documents in order.
- May total a few hundred bucks for the year.
- Online DIY service: There are a growing number of DIY-type services online that you can use to draw up the documents. This method tends to be better for the more straightforward scenarios, as you may not be able to consult directly with an attorney.
- Typically can get done for under $1,000.
- Local attorney: If you have any level of complexity or simply want a more in-depth experience, this is the way to go. It’s the most expensive of the 3 options by a healthy margin, but could very well be worth it.
- Can easily run into the thousands of dollars.
What to Do Once The Documents Are Drawn Up
Once the documents have been reviewed, signed, and notarized… the work is not quite done!
- Save and store them securely (both physical and digital copies)
- Review the plan with your financial advisor
- Talk to anyone with a role in your plan
- Fund the trust (if one is created)
- Share access to anyone who may need it
The Estate “Green Box”
This isn’t a “formal” part of an estate plan – and not an idea we came up with – but it can be incredibly valuable.
You may know from experience, or can at least imagine, how deeply emotional the passing of a loved one can be. Think of the Green Box as the ultimate instruction manual for those you care about, as they attempt to pick up the pieces during what will be a very challenging time.
Include any of the following that pertain to your situation:
- Letters to loved ones
- A list of smaller mementos that aren’t listed in the Will and their intended recipients
- Copy of your Will
- Power of Attorney documents
- List of passwords or the master password to your password manager
- List of insurance policies
- Net worth statement and the location of all financial accounts
- Personal property appraisals (jewelry, collectibles, etc.)
- List of trusted advisors (attorney, CPA, financial planner, etc.)
- Business info (partner contracts, org sheets, succession plan documents)
- … plus anything else you deem important or helpful!
It can be either physical or digital (it doesn’t need to be in a box). Once you’ve put all of this together, be sure to store it in a secure place, notifying the right people of its existence and location.
Admittedly, this is no small feat. And it will almost certainly be emotionally taxing. So give yourself plenty of time to take on the task. If you like to use the Spring to declutter your finances, maybe target getting this done toward the end of the year.
When to Revisit and Review It
At Upbeat Wealth, we revisit estate planning with our families every other year and find that to be a comfortable baseline cadence. However, there are life events that necessitate reviewing and updating your plan, such as getting married, divorce, having kids, moving to another state, buying/selling real estate, and so on…
Your estate plan will grow and evolve as your life does!
Conclusion
To sum it all up, here’s our recommended estate planning order of operations:
- Review Beneficiaries, as they override anything in your Will and are not subject to probate.
- Get or Review Life Insurance if someone depends on your earning potential.
- Create a Basic Estate Plan, or at least determine who will assume key roles if you are no longer able to do so.
- Establish a Trust if you want to have more control over how your assets are distributed after death and/or to avoid probate.
- Create a “Green Box” that contains helpful information for those trying to pick up the pieces and do the heavy lifting after your passing during an incredibly emotional time.
The absolute best thing you can do to get started is simply talk about it. Get the wheels turning. While not the easiest topic to discuss, it’s far and away one of the most important. Reflect on what your wishes are, what they would be, and share them with loved ones. Write it all down. Then, get to work on formalizing the plan!
Eddy Jurgielewicz, CFP® is a Partner and Lead Financial Planner at Upbeat Wealth, a fee-only firm based in New Orleans and serving clients virtually across the country. He specializes in providing straightforward financial guidance to ambitious young families as they navigate life’s many milestones.
Do you have questions about what we shared in this post, or anything else in general? Feel free to schedule a free consultation or drop us a line!
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