Don’t Put it Off: A User-friendly Guide to Organizing Your Estate Plan
It is an unpleasant thing to think about but having your estate in order before something happens to you is critical.
By Echo Huang, CFA, CFP®, CPA
Nobody likes thinking about the end, or picking a guardian to raise your children, or having to pick which of your children would best at managing your money in your absence. But the thing about estate planning is, if you don’t do it, you lose your say in how things are handled when you pass away or if you are incapacitated and unable to speak on your own behalf. Without a will, your estate may end up in court, divvied up based on a judge’s decision—not your own. Without specific terms set in place, you may not get the medical care you would prefer, or the preferred custodial caretaker for your children. For those reasons, it is better to face the discomfort of our mortality and make sure everything is up to date and in order. With your estate planning checked off your list, you can rest assured that in an unthinkable situation, you and your family will be covered.
You’ve decided to get on top of your paperwork, but where to start? Below we will detail the basic documents that you will need.
- A Will. Your will designates who will inherit or control your assets when you die. A will is very important if you have young children, as in it, you can detail the wishes for their future care. In your will, you can name guardians and name fiduciaries to act on your behalf. In your will, you can name trustees to manage a trust. You can also name an executor to oversee your wishes. If you have a specific property, art, or investments that you would like given to certain people, charities, or organizations, this is also the place to do that.
When putting together your will, it’s good to look over how much you have to live on. Do you have excess capital that you want to give away while still alive to save on taxes after death? If the idea of giving away assets while alive doesn’t make you comfortable, perhaps giving away future growth after death may be better. If you own a business you should consider an exit strategy or a succession plan, especially if you have children. If you plan to give money to children or grandchildren, you may want to consider limiting or postponing access by putting it into a trust. If you do decide to put gifts into trusts, you will also need to consider who would act as trustee(s).
- Durable Power of Attorney. A power of attorney form is a document in which you authorize somebody to act on your behalf regarding financial decisions. This person is known as the attorney-in-fact. You can determine how much power the person will have over your financial affairs.
A “durable” power of attorney form is one that remains valid even if you become incompetent or incapacitated. You can design it to take effect immediately or stipulate that it only goes into effect when you become unable to make decisions for yourself. This is known as a “springing power of attorney."
If a situation arose where you were unable to manage yourself, your care, or your finances, a person close to you, often a spouse, would step in to act on your behalf. There are many reasons a spouse may not be the ideal person to take on this role, especially if they have health issues or other reasons that make them unfit. Often a child is then named for the role. The person granted power of attorney has a great deal of control in making choices for you and your assets, so choosing wisely, and putting your wishes in writing is a good way to ensure your best interests down the line.
- Revocable Trust. In addition to having a will, some people use a revocable trust should they become unable to manage their affairs. You would still need to designate a durable power of attorney since the successor trustee or co-trustee would only have the authority to manage the money in the trust. The durable POA would allow them access to assets outside the trust. The appointed trustee can act on your behalf and manage the trust. The benefit of this setup is that creating and funding the trust avoids probate, which is the process by which your executors submit your will to a court to transfer assets to your beneficiaries.
If you have a trust that has over $1 million and you don’t want your spouse or one child to be the successor trustee upon your death, you can consider naming a corporate trustee that can act in a professional manner and follows your wishes precisely. This arrangement may reduce the conflicts and tensions among the child who has control and the other children.
After this trust document has been signed and executed, do not forget to change your ownership of assets from individual and joint to your revocable trust. I have seen many cases where an estate plan was not implemented properly by forgetting to retitle assets, change beneficiary designation forms for retirement accounts or life insurance.
- Health Care Directive. A health care directive sometimes called a living will and power of attorney for health care is a written document that informs others of your health care wishes. It allows you to name a person (or “agent”) to make decisions for you if you are unable to do so. In most states, anyone eighteen or older can make a health care directive.
A health care directive is useful if you become unable to adequately communicate your health care wishes. The directive guides your physician, family, and friends regarding your care at a time when you are not able to provide that information. While you will still receive medical care without a health care directive, it will help you get exactly the care you would like, particularly near the end of your life when your interests may not be the same as those who survive you.
Before doing a health care directive, think about your goals, values and preferences about healthcare, such as the type of treatment you do or do not want; for example, intubation or the use of feeding tubes. You should also consider whether you want to donate organs, tissues, or body parts. You can also include wishes for funeral arrangements.
Without a health care directive in place, your doctor may provide you with medical treatments you may have refused if able to. It is important to have a directive if there are disagreements within your family on how to proceed with care.
- Irrevocable Life Insurance Trust. If your current estate exceeds the estate exemption of $2.7 million in Minnesota in 2019 and your assets are projected to grow to over $11 million during your lifetime, consider placing your life insurance policies in an Irrevocable Life Insurance Trust (ILIT). An irrevocable life insurance trust allows your life insurance proceeds to be available to your loved ones such as spouse and children. It also gives you more control over your insurance policies and the money that is paid out from them. You cannot serve as the trustee of the trust and you must relinquish any right to modify or dissolve it. The benefit of this asset is that it will not be included in your or your spouses’ taxable estate. This can be helpful if your survivors need access to money fast to cover taxes or day-to-day expenses immediately after your death.
The benefit of end-of-life planning comes from knowing that your wishes will be fulfilled if you are unable to voice them. There is security in knowing your family will be provided for if something happens to you. The good thing about estate planning is that there are qualified professionals available to help you navigate through the process. Their goal is to fulfill your end-of-life wishes, thoroughly and legally. At Echo Wealth Management, we review each client’s estate plan and coordinate with an estate attorney to work on a relevant plan based on their current financial situation and projected wealth in the future. So, reach out to your financial advisor, estate attorney soon and work together to create your own estate plan.