Estate planning is one of the most critical aspects of the wealth planning process. It is often an overlooked and disliked topic to face because it involves death and many subsequent emotional decisions. However, when it comes to protecting your family and having your story told, estate planning is essential.
Estate planning is;
- The process of accumulation, management, conservation, and transfer of wealth, considering legal, tax, and personal objectives.
- Not always clear-cut because emotional issues such as control and affection must be considered.
- The efficient transfer of assets to minimize stress and cost to efficiently transfer assets to the people you want.
- Not just for “the wealthy.” Although people who have built some wealth do often think more about how to preserve it, proper estate planning usually means more to families with modest assets, because they can afford to lose the least.
Key Documents That Make Up an Estate Plan
I prefer to look at estate planning as the ability to tell your story exactly how you want it to be said. Deciding who will raise your children, who should receive specific assets at specific intervals of time, and the ability to leave a lasting legacy are all critical elements to being able to tell your own unique story at the end of your life.
Having an estate plan allows you to tell this story in a process that avoids the public eye, reduces the emotional stress and burden of those that you care about, and reduces the cost of settling your estate by avoiding probate court. Here are the key documents that make up an estate plan;
Revocable Living Trust
- A Revocable Living Trust is the entity that holds the title of whatever assets you put into the name of the trust. Assets held in this trust will avoid probate. Revocable means that you are free to revoke, amend, or change anything in it at any time until you pass. Living means that the trust is in effect while you are alive. It also directs your wishes regarding the administration and distribution of the trust assets after your death.
- Funding is a key but often overlooked aspect when it comes to establishing a Living Trust. Assigning your trust as a primary or secondary beneficiary of all your assets is vital. If not done correctly, your assets could remain at risk.
Durable Power of Attorney for Financial/Asset Management
- A legal document that enables you, as the person who draws up the document (known as the Principal or Grantor), to designate another person to act on your behalf as your agent (known as the “Attorney-In-Fact”) for all your financial and legal affairs outside of your Revocable Living Trust.
- The document empowers your agent to sign your name on legal documents, handle your real estate, business operations, insurance, tax returns, etc., in your absence (e.g., out of the country) and in the event, you become incompetent or incapacitated on a temporary or permanent basis.
- A Pour-Over Will is a Will that should be created when a Revocable Living Trust is executed. It is a safety net that states that any assets left out of your Revocable Living Trust will become part of (poured over into) that trust upon your death.
- You do not want just a regular Will without a trust since the Will is a set of instructions to the probate court! Laws may vary by state.
- A Will has no impact on tax planning.
- Any Will take effect when you die.
- The person/people you choose to be the legal guardian(s) of your children are named in your Will.
- Your will is a public document whose instructions for transfer of property upon your death are enforced through the guidance of probate court (a good reason why you need to have your property in a “nonpublic” trust.)
- When you execute a new Will/Pour-Over Will, your old one becomes obsolete and should be destroyed.
Advance Health Care Directive
- A legal document that gives the person you name (called your Health Care Agent) the authority to make health care decisions for you if you cannot make them for yourself. Such decisions include: what hospital to be in; what doctors to use; when to decide to perform surgery; when you should be put in assisted living, etc.
Key Considerations in Building an Estate Plan
Although you may see online resources that can put together an estate plan on the fly for one low cost, I strongly recommend that you need to work with an estate planning attorney to draw up your entire estate plan.
You can change whomever you have designated as your Successor Trustee(s), Financial Power of Attorney Agent, Health Care Agent, and Guardians of minors at any time before death. This is one of the most critical decisions you will make during the estate planning process, so choose carefully.
- The people that you choose should be a financially savvy relative or a good friend. Ask that individual if they are comfortable taking on the responsibility. Try to pick an individual who lives relatively close if feasible as they will most likely have to interface with your local professional advisors and deal with local assets and institutions.
- You must trust this person(s), as they will have total control over signing your name on your accounts, your legal forms, etc.
- When it comes to the guardianship of your children, pick an individual or a couple whom you believe will raise your children as close to how you would.
When it comes to setting up an Estate Plan one often looked item is digital assets. What constitutes a digital asset? Think about iTunes, Facebook, or Twitter accounts, or a website with hundreds or even thousands of followers. These all constitute digital assets.
As more and more of our lives become digital or even cloud-based, people need to begin to consider how these assets may or may not transfer to one’s heirs. According to this WSJ article, “The most important thing, estate attorneys say, is to establish procedures for protecting and granting access to passwords and for transferring assets and account ownership. The rules can vary widely depending on the state. While there is nothing in Twitter’s company rules and conditions that says one of its accounts must close if the owner dies, Apple iTunes says it does not have a policy that allows anyone to will or inherit an iTunes account.”
Christine Benz, Director of Personal Finance at Morningstar, states in her article Do You Have a Plan for Your Digital ‘Estate’? “the basic idea is to knit these digital assets in with the rest of your estate plan.” Benz goes on to note a few keys to getting your digital house in order which includes the following;
- Take an inventory of your assets
- Be sure to have a plan to back up those assets
- Put your plan in writing
Managing Your Family’s Financial Affairs When You Are Not Able
When I first sit down to speak with people about wealth planning, they hear me talk about risk management and not investment management for a good portion of the initial conversation. Usually, risk management is what people do not understand, and if they do understand it, it is not a topic that they feel very comfortable talking about.
Being able to see your final wishes through to completion, protecting your family from a catastrophic financial event, or ensuring that your children are properly taken care of in your absence are all responsibilities that you should not take for granted. You need to make what I call strategic empathy part of the wealth management process. Here are a few critical pieces of this process;
- Help draft the necessary estate documents that help dictate who would take care of your family and assets should something happen to you. Be sure to involve those people that you want to be included in your plan so that they are comfortable making decisions on your behalf;
- Understanding how much protection you need from a financial standpoint to take care of liabilities and goals again if something should happen to you;
- Know how much you need in a liquid account to cover 3 to 6 months of living expenses.
You can be doing everything right within your wealth management plans such as saving enough, controlling expenses, and working with someone on individual investments and asset allocation decisions. However, don’t overlook the critical estate planning element of a complete wealth management plan because of fear or the distractions of everyday life.
For questions about any wealth planning and asset management topics, do not hesitate to contact me to find out what options may be best for your situation.