Estate Planning: The Essential Instruments
Estate planning isn’t just about protecting your assets—it’s about protecting yourself and your people. A thoughtful plan can ensure that your feelings about religion, medical care, what types of treatments you’ll receive or where you want to be cared for are respected if you are not able to speak for yourself. It can ease the burden for the people who must continue on without your input, and it’s necessary to establish legal guardians of your minor children. Importantly, estate planning is something you should do now—no matter what life stage you are in.
Planning for Care Ensures That You Decide What Will Happen
Planning the transition of your assets isn’t just about maximizing the amount passed on and simplifying the handover—it’s really about ensuring that the help, love and wisdom you provide for your people now can continue even after you are gone. A thoughtful plan can look ahead and smooth obstacles in the same way you would if you were present.
Having a plan in place to carry out your wishes if the worst happens—your minor children are left on their own, or you become incapacitated—is essential. Otherwise, a court will decide who cares for your children and you will have no say in how your own care is managed or what happens to your assets.
Using the court system to settle your will—the process known as probate—creates a public record of all your financial information, and the most private details of your family. Fortunately, there are several good options to avoid this lengthy, public, and expensive process.
You’ll need to work with an attorney to set up some important components of your plan, but there are also strategies that your financial advisor can put in place on your investment accounts to minimize costs and effect seamless, efficient transfers of your estate when it becomes necessary.
There are three key concepts involved in planning an estate transition:
Asset-based strategies to avoid probate
Wills (could be used to appoint a guardian for minor children)
Living trusts
Health care proxy that specifies your wishes and appoints someone to make healthcare decisions on your behalf
Durable power of attorney that gives someone you elect the legal right to handle your finances and pay for your care
Minimizing Probate Through Asset-Based Strategies
Probate is the legal process by which a will is reviewed and determined to be valid and authentic. The court appoints an executor named in the will to administer the process: collecting the assets, paying the liabilities, and finally distributing the remaining assets. Probate can be lengthy and expensive—and it is not private.
Assets that allow you to name a beneficiary will not need to go through probate and will transfer ownership relatively easily and quickly. These include life insurance proceeds, IRAs, 401(k) plans, and annuities.
Co-ownership of an asset can also avoid probate, as long as it is held as “Joint Tenants With Rights of Survivorship” (JTWROS). There are several conditions that must be met, and you may need to consult with an attorney. However, the advantage is that the property passes immediately and automatically to the survivor.
Assets that can be held this way are legion: cars, real estate, bank accounts, brokerage accounts, collections, etc. There can also be more than one co-owner. On the death of one owner, depending on the type of property, the transfer is effected by either an affidavit, providing the death certificate of the decedent, or otherwise taking control of the property.
This strategy works very well for the family home and when deployed with financial assets it can ensure that they remain accessible to the surviving spouse or are easily transferred to children. However, all co-owners have equal shares, and have the right to control the accounts.
2. Creating a Will
A will is the most common estate planning instrument. While it is the only legal way to appoint a guardian for your minor children, a will can also be used for other estate planning purposes and offers a great deal of control over how your assets will be distributed, and who your beneficiaries will be. The drawback of using a will for passing on assets, in addition to naming a guardian, is that wills are subject to probate, which can be lengthy, expensive, and public.
It’s always advisable to see an attorney about creating a will, particularly if you are using it to name a guardian for your children. An attorney can help you outline your wishes and if the care of your child is complicated or your child has specific needs, an attorney can ensure that a comprehensive plan is included. The selection of an attorney is very personal, so it may make sense to start by asking someone you know and trust. An important consideration is that wills and estates are very specialized areas of law; the attorney must be one who specializes in that area. A generalist may not have the expertise you need. Your financial advisor may be able to provide a referral to a local firm they’ve worked with.
3. Living Trusts
An option to avoid probate is a living trust, also called a revocable trust, that allows you to access the assets in the trust during your lifetime, with the remainder passing to your beneficiaries. Because it avoids probate the assets will be distributed more quickly, without additional expense, and with privacy. While a will requires an executor, a living trust has a successor trustee. And if you have minor children, you will still need to create an additional document called a pour-over will and designate a guardian.
Because a living trust is a more complex document than a will, the expense of creating it will be greater. Additionally, a trust must be funded; the assets named in the trust document must be transferred into the trust through separate processes. Depending on the size of your estate, the complexity of your bequests, and your own desire for speed and privacy, it may still be the right choice.
So, how can you prepare? The first and most important step is to set up the essential documents that will ensure your plan can be legally enforced.
The essential documents are:
4. Determining Your Health Care Proxy
A health care proxy is a document that appoints someone to make health care decisions on your behalf, and it can also express your wishes for what type of care you will receive. You can be as specific as you like—from treatments, to doctors and hospitals, to when you choose to stop receiving care—and anything else you choose to include. States vary on how they address these two issues. In some states, you will need to combine the health care proxy with a living will that sets out your preferences for the medical care you will receive. Together, these are sometimes called an “advance directive.”
Other states have developed simple documents that combine both and do not require a lawyer. Massachusetts, for example, has created a Health Care Proxy form that is easily available online and when executed and witnessed is a legal document. When setting up your health care proxy, check to understand what’s available in your state. Your doctor’s office is a great place to start as they will be most familiar with your health situation and they have a stake in ensuring you have a treatment plan and someone to carry out the plan in place. If your state has created a Health Care Proxy, they may have the forms available. If your state does not offer this, you’ll need to speak with a lawyer.
5. Creating a Durable Power of Attorney
The third essential document is a durable power of attorney. It’s called “durable” because it does not end if you become incapacitated, like a regular power of attorney does. Once you have appointed a healthcare proxy and specified your preferences for care and/or created a living will, you will need a durable power of attorney for finances. The durable power of attorney will need to be drafted by a lawyer.
This document empowers someone to make financial decisions on your behalf, including paying your bills and paying for your care. The person you select does not have to be an attorney but will be referred to as your “attorney-in-fact” or “agent.” If necessary, this person can hire appropriate professionals that will be paid from your assets.
The Takeaway
You’ve worked hard to build a life for yourself and the people you share it with. To make sure your wishes—both for yourself and everyone you care for—are carried out, it’s important to put some thought to your estate planning. Having the basic legal instruments in place, and updating them as needed, is the beginning of your estate plan.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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