“Death is not the end. There remains the litigation over the estate.”
Have you created your estate plan?
Most of us want to avoid litigation especially over an estate. Having a plan helps you do that. The best time to think about your plan is when you don’t have a compelling reason to do. Keep your family’s best interests at heart with a well developed estate plan. By creating your estate plan you will have control over your asset distribution during your lifetime to your loved ones.
A significant portion of your assets can be easily transferred to your intended heirs, avoiding often painful and lengthy probate court procedures.
What Is Part Of Your Estate Plan?
To design your estate plan in 6 steps we address the following:
- Organize your assets into nonprobate propery.
- Know who your designated beneficiaries.
- Determine if you have joint ownership with rights of survivorship.
- Set up your will for probate property.
- Have a letter of instructions to loved ones.
- Consider a trust if appropriate.
- Donate assets to your charity.
- Health care proxy or advance directives documents are essential.
- Testamentary Letters.
Having a plan is important for your family and is in their best interests. Yet, only 40% of US adults have created a will or a living trust, with 81% of those age 72 or older and 58% of boomers, ages 53-71. Even younger people, especially if they have young children, can benefit from putting together an estate plan.
6 Reasons why you need an estate plan
#1 Assure financial support for your surviving spouse, your children and your grandchildren, and even later generations. The passing of a loved one is stressful and often traumatic. Adding financial stability is helpful.
#2 Make sure your wishes are carried out while you are of sound mind. We never know when our mental capacity diminishes through tragic means or aging.
#3 Avoid litigation for your family in the future. Make your intentions for distribution known so they won’t be challenged in probate court which takes time and costly.
#4 Arrange your estate plan with capable professionals to steer away the potential publicity that can sometimes accompanies the passing of a loved one.
The Great Aretha Franklin died in 2018 without a trust or will forcing her sons to file documents in a probate court in Michigan. Prince’s estate was not covered by a plan when he died in 2016, and the distribution of his assets will likely take more time and more public scrutiny.
#5 Minimize taxes and costs when it is time for asset transfers.
#6 Support a favorite charity, address pet care and consider digital assets.
How To Start Your Basic Estate Planning
Start discussions with your attorney, tax accountant and financial advisor.Through frank discussions, your goal is to put together the most beneficial plan for your situation at the most effective cost. Make sure that you account for your digital assets which we fully address in this post.
You built your wealth. Now you want to properly distribute your assets according to your wishes.
Provide a plan for your family, make sure your assets go where you intend them to go and that the person you expect to be executor of your will, will be the one responsible for administering your estate will, in fact, be that person. Pick your potential executor.
A Simple Estate Planning Guide In 6 Steps:
Set up most of your assets as nonprobate property. These assets outside the will and for many of us, are the bulk of our estate.
This property will automatically transfer to your designated beneficiary(ies) upon your death. One of the most important assets you will need to address is your home (eg. house, condominium, cooperative, vacation home) unless you rent only.
Your nonprobate property are assets that transferred to survivors by contract based on your designated beneficiary. Name beneficiaries for all of the assets that you can.
Your nonprobate assets will include:
- retirement accounts, including 401(k) plans,
- IRAs, pension plans,
- payable-on-death clauses in bank accounts, investment portfolio(s),
- life insurance policies or
- by owning accounts with another person, usually a family member, through rights of survivorship.
These assets are generally transferred directly to those beneficiaries that were designated by you.
At the time you opened these accounts, you likely designated your beneficiaries on a legal form.
Review beneficiary designations periodically
You may want to change your beneficiaries as you go through life. For example, if you designated your mom when you first set up your accounts, it is probably a good idea to refresh your beneficiaries. Often, after life changes such as a divorce, remarriage or the passing of a loved ones, we want to update our beneficiaries. Sometimes we can provide for a contingent or secondary beneficiary. To understand the importance of designated beneficiaries, please read here.
Joint ownership with rights of survivorship
Husbands and wives (or parents and children) may have joint ownership of assets called joint tenancy with the right of survivorship.
Transfers can be made by property ownership designation These assets can include bank accounts, investment accounts, cars, and home(s). Upon the death of one owner, the surviving owner(s) will receive this property by operation of law, rather than through the will.
These assets will be a majority of our assets and its transfer is simplified.
In most cases, your intended recipent need only present an official death certificate and the funds or property will be transferred to his or her name in the ordinary course of business. These assets do not pass through the will or the probate process.
Set up your will for probate property
A Will often called “Last Will and Testament” is a formal written document that directs how assets not addressed in Step 1 are to be distributed upon the death of an individual.
The individual making the will is called the testator. He or she designates how his or her remaining assets should be distributed after death.
Appoint a personal representative, commonly called an executor and give the executor the powers necessary to fulfill your wishes. Without a will, your state’s intestacy laws will dictate how your assets are to be distributed.
Don’t have co-executors
Sometimes people opt for co-executors, such as a spouse and an adult child who they believe can work in unison. Relatives and friends are not great choices to perform the executor’s duties.
Choose one executor that is trustworthy. While co-executors may sound harmless, acting in unison in reality can be more difficult. Executors may be called on to pay off debts, liquidate assets, file tax returns and estate tax returns, and may need to get the court’s permission to distribute the balance of the remaining assets, including money.
Spouses have legal rights to each other’s estates
State laws presume that married couples share their fortunes equally.
Sharing your property with your spouse is a right. This is called “the partnership theory of marriage rights.” Property acquired during the marriage and titled in the name of one partner (except for property acquired via gift or inheritance) normally becomes property of both spouses. Any spousal rights to claim an inheritance from the other spouse under law are void upon divorce.
Any debts of one spouse are assumed by the estate, not personal liabilities of executor or the beneficiaries.
There are nine community property states where all the money, assets and debts acquired during the marriage is legally part of the joint property of both spouses.The rights of husbands and wives are equally protected.
Among the topics that a will should address are:
- Decide what property, including personal property that has sentimental value.
- Determine who will inherit the assets.
- Designate a trustee and guardian to manage assets if there are children under 18 who may be beneficiaries under your will. The trustee and guardian can be the same.
- Handle digital assets which may need you to designate access to family members the ability to see your social media accounts.
For your will to be effective and valid, the will must signed according to your state’s law.
Generally, a will must be in writing, signed before a minimum of two witnesses who can attest to your mental capacity and soundness at the time of signing the will.
A valid will is not likely to be challenged
Challenge-proof your will with your attorney’s guidance. The will becomes effective upon the death of the testator. Up until that time, a will can be changed as often as desired by the testator. The original (not copied) version of the last will should be kept intact and often stored in a safe deposit box or safe place.
Leave your letter of instructions
Write a letter of last directions, separate from your will, that may provide your preferences regarding funeral and burial arrangements, who speaks at your funeral, contact information for family, friends, colleagues and such.
There may be items that weren’t part of your will but are important to you to let your surviving family members know about. In the event that any instructions conflict with direction provided by the will, the will trumps the information in this letter.
Leaving Guidance For Family Is Helpful
Organize financial information, people to contact, important papers (this could be in the form of a memoir, for example) and provide the location of where these things may be found for your family. This letter doesn’t have the legal force of the will but may amount to personal information that family could use and you wish to share.
Who Should Consider A Trust?
Trusts have additional features not found in wills.
A will may be more commonly known and the first place to handle probate property but trusts are increasingly used in estate planning. Use trusts when you have a more complex estate, have less liquid assets, and desire privacy as trusts avoid probates. Trusts provide some features that wills don’t.
Trusts can be used before death, as living trusts. These instruments can take effect while the grantor is alive and can give the grantor the right to make changes. These are called revocable living trusts and the grantor can be the trustee. However, if the grantor is unable to serve because of becoming incapacitated, a new trustee can be named.
Living trusts can also be made irrevocable meaning no changes can be made by the grantor.
Irrevocable Charitable Remainder Trust (CRT)
For people who have significant appreciated assets may want to consider setting up a charitable remainder trust. A CRT is an irrevocable trust that generates a potential income stream for you, as the donor to the CRT or other beneficiaries. The remainder of the donated assets go to your favorite charities. There are a number of benefits, notable income tax deductions while preserving the value of your assets. You can read more about it here.
Donating assets to a charity
CRTs are tax-exempt irrevocable trusts that reduce taxable income of the donor during their lifetime. The assets are irrevocably donated into the trust. Income is distributed from the assets to you and your spouse for a set period or for life. The charity you designate will receive the CRT assets when you and/or your spouse die.
A different kind of trusts are the testamentary trusts, usually contained in wills that go into effect after the death of grantor.
Living wills and medical powers of attorney
Prepare health care proxy documents, often called advance medical directives, that is, a living will and your durable powers of attorney.
Write a living will detailing a person’s desires regarding medical treatment when they may no longer be able to express their wishes. This provides informed consent.
A living will is separate from your will made in consultation with your attorney, and signed by you. This medical directive can help reduce ambiguities during a difficult time on the use of feeding tubes, for example and being kept alive unnecessarily.
The Terri Schiavo case
Anyone remember the legal battle in 2005 surrounding Terri Schiavo and the right to die movement has spurred many of us to consider a living will as an important document. While sad it provided urgent awareness of why you need to address these possibilities.
Use the durable power of attorney to appoint someone you trust as your agent, to do certain things and take actions in your name if you are unable to do so. This agent is also called “attorney in fact.”
When the grantor is incapacitated or disabled
Under a power of attorney, the agent can bind you to contract obligations, sell, buy or close title to real property in your name, conduct banking or other transactions. Every state has its own requirements for ensuring valid powers of attorney. These powers must be made “durable” which means that the agent’s authority survives any incapacity or disability of the grantor. The point is not to go and buy a form online or at a store. You need to designate someone who is trustworthy.
These powers are used when the grantor is unable to physically appear at a bank, through injury, confinement or frankly just does not want to go. This instrument is crucial when caring for a person suffering from dementia, Alzheimer’s Disease or other limited mental capacity diseases. The most common uses of this power of attorney are in banking and real estate transactions.
Upon your death, your executor will become effectively the administrator and fiduciary of the will.
After appointing an executor, the appointment must be confirmed by the probate court upon your death. The executor’s role is then effective and can be expressly relied upon by financial institutions and insurance companies.
This executor will submit a petition to the probate court in the jurisdiction where the testator passed away. Assuming no challenges, the court will formally appoint the executor by issuing Letters Testamentary.
Usually, third parties require original letters so you have to get these directly from the court. They are not available online. These letters are court documents that allow the executor to act as a fiduciary under the supervision of the court.
These testamentary letters along with the legally binding death certificate are the key documents that give the executor the force to deal with potentially numerous parties that have an interest in your estate.
Estate planning decision-making can be difficult. However, it provides peace of mind by reducing some of the uncertainty that may arise for your family. Estate planning is in your family’s best interests.
Protecting your assets and having a plan to distribute them to loved ones should reduce potential angst that may follow. Engage an accountant to help you realize tax efficiencies.
Have you started thinking about estate planning? It is usually easier to do when you have no urgent reason to do so but are thinking of your family’s best interest. This guide is designed to get you started thinking about your plan but you need careful consideration and professional guidance.
Please share any thoughts or comments you may have. We would love to hear from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.