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Estate planning: Everything you need to know

At a glance:

There is a widespread misconception that "estate planning" is of importance only to the wealthy. This is due, in part, to the emphasis of the financial service industry on planning for estate taxes, which concern only larger estate owners.

There are, however, a number of other significant issues that deserve everyone's attention.

A good estate plan provides a legal and practical mechanism to dispose of your property after death in a way that fulfills your wishes and the needs of your survivors, while minimizing taxes.

What is estate planning?

Although one's "estate" is adequately defined as his or her property, there is no precise definition of estate planning.

Your estate plan can be viewed as a series of steps to be taken so that, after you die, your property will be handled in a way that recognizes your values and wishes regarding your survivors and any charitable interests you may have.

When people start thinking about these things, some important lifetime concerns often come to mind, too, such as preparing for possible physical or mental disability. So, those issues are frequently addressed as well when one plans his or her estate.

Getting started

Where to start? The prospect of estate planning can be intimidating because there is usually no single clear answer to that question — there can be so many interrelated human and financial factors to consider. Perhaps your thinking should focus on these two questions:

  • First, if you died tomorrow, what would you want to happen?

  • Second, what, most likely, actually would happen?

The purpose of your estate plan

A good estate plan is designed to bring reality in line with your desires to the greatest extent possible, given the practical problems and limitations you face. The steps in the plan may include candid family discussions, drafting a will and trust, changing the beneficiary designations on some accounts, buying life insurance, etc.

As for "problems," experience shows that the most common ones are insufficient money to fund all of one's goals, and survivors who do not act as hoped or expected.

The most important element of an estate plan is giving it the thought it deserves. Taken step by step, the process is not nearly as daunting as many people fear.

What would happen to your money and property if you died tomorrow?

The answer to that big question is a composite of your responses to a range of smaller questions.

Mull over the following questions, and if the answers or implications are not clear, or if they trouble you, make a note of them — a real note, not just a mental one. You will then have a list of issues on which to focus, and the simple act of writing things down will be invaluable in clarifying the thought process.

Many people who have been uneasy for years thinking about this find it improves their peace of mind just to make themselves spell out exactly what bothers them.

Questions to ask yourself

Look over this list:

  • Would there be mistrust, uncertainty, and bickering among your survivors in deciding how to handle your property and wrap up your affairs? Is there anybody who, if not prevented, might actually take your property or funds without authority?

  • Do you have a will that reflects your current wishes? If so, is all your property actually subject to probate court and the terms of the will — or is it instead set up to pass another way at death — e.g., through a beneficiary designation form, as with a 401(k) account, or to a co-owner, as with a joint savings or checking account?

  • If you do have property subject to probate (e.g., furniture, a house, or an account in your name alone), but do not have a will, what does your state's law of intestacy say about who takes property after a person's death?

  • What are the needs, abilities, and weaknesses of your survivors, especially your spouse and children, if any?

  • Are your survivors responsible individuals, capable of managing and using an inheritance wisely if they receive it outright? Or will they need protection from their own youth, financial inexperience, or bad habits? What about the influence of others? Would your bequest to a child need protection from his or her spouse or creditors?

  • If your current spouse is not the parent of your children, how — and when — will your estate be divided among them?

  • What kinds of property do you own, e.g., real estate, mutual funds, a family business, etc.? Can your property get along without your active management, at least for a while? How much of it could be converted to cash easily and quickly, if necessary, at reasonably good prices?

  • Is the net worth of all your property — or of the combined property of you and your spouse — more than the amount at which the federal estate tax begins to bite and tax planning is called for?

  • What are your responsibilities to your survivors? Would you be leaving young children and the surviving parent, for example, with sufficient assets to maintain the family's standard of living? Or, in contrast, do you have grown children with good jobs, and a spouse with his or her own adequate retirement plan account?

  • If your children are under age eighteen, have you found a suitable guardian for them in case their other parent also dies?

  • Do you have a disabled child or family member who must be provided for separately, for life?

  • If you have an IRA or retirement plan account, have you selected the appropriate beneficiary and distribution options?

Estate planning needs vary among people

Some peoples' values, wishes, and survivors' needs, however, really are very simple.

So, too, should be their estate plans—perhaps just a two-page will saying, for example, "Everything to my three children, in equal shares." Other people have various contingencies for which to plan. Some form of charitable contribution—during life or at death—may be part of their plans. There may be a need for life insurance.

Many want to keep one or more "strings attached" to payments made to their chosen beneficiaries. These strings come in infinite varieties, but almost always, keeping strings attached requires a trust.

10 simple things you can do to protect your family and money

A short checklist is not meant to solve all your estate planning issues. It's just a way to get started. You may find that once you have done the simpler things, you have mental energy freed up to tackle the bigger tasks.

  • Inventory your stuff. This means your physical assets — jewelry, collectibles, cars, electronics, tools, home, etc., and your non-physical assets — retirement accounts, bank accounts, life insurance, brokerage accounts, advisors, and other insurance. Include your debts, too — credit cards, mortgages, auto loans, etc. Include contact information for any accounts. Make copies of this list and keep them in a safe place. If you die suddenly, your family will need to find this information very quickly.

  • Gather your life documents. This means all deeds, birth certificate, marriage certificate, property tax records, titles, etc. Let important people know where these are kept. If you die, people will need this information fast.

  • Make a will. Once you have inventoried what you own, ask yourself, "Do I want the courts to decide who gets all this after I die?" If you don't, then make a will. Will-making software is available, but an estate attorney is your best source of help. Make sure your will is signed, dated, witnessed, and notarized. If you are not ready for this step, consider writing your wishes on paper as a start (this will not have legal authority. It's just a way to get started thinking).

  • Choose an administrator. This person will carry out your will after you're gone. Choose a responsible person of sound mental state. Leave your emotions out of the selection process.

  • Get your paperwork in order. This includes a copy of your list of assets, your sources of wealth and debts, your attorney information if you have one, and all other necessary documents. Put it all together, make a few copies, and give one copy to your administrator. Review this paperwork periodically.

  • Update any life insurance and annuities. Make sure that the beneficiaries listed there are the ones you want to receive your money after you die.

  • Ensure that beneficiaries are named on your accounts. This includes retirement accounts, life insurance policies, savings and checking accounts, brokerage accounts — any accounts that normally involve beneficiaries.

  • Assign guardianship for your children or other dependents (and your pets, too). Name a guardian even if your children aren't born yet. For pets, you can name a guardian in a will or a pet trust.

  • Determine how you want to handle your own incapacity. This is where an advance directive (called a living will in some states) and a power of attorney come into play. At the very least, start thinking about what you would want.

  • Leave plans (or wishes) for a funeral. Put these in writing. A funeral, a memorial, donating your body — think about these things now. If you die suddenly, your family will need to make a decision about your funeral very fast. Put these plans with your other paperwork.

There are other necessary things you need to do beyond this simple list, like visit an estate planner or an attorney, and perhaps set up some trusts. But the important thing at this stage is to get over your inertia and start the ball rolling.

Once you have done the tasks on this list, you may find yourself free of mental burdens that were using up space in your mind for years, and you will feel a certain peace of mind.

Wills and how to craft one

Although some states include a form for a simple will in their statute books, there is no particular format required. The design of the document is usually straightforward, even if the language used by lawyers is a bit stilted. The text generally runs 2–5 pages.

Keeping in mind that such a "simple" will may not be what you need at all, look over this description of a typical simple will structure just for reference purposes:

  • A paragraph stating that the will-maker is of sound mind and intends this document to be his or her "last will and testament."

  • A paragraph naming the executor — there should be an alternate, too.

  • Nomination of guardians for any minor children in the event both parents die prematurely. A guardian should be named for the person and for the property of each child. (These roles can be filled by the same person.) Note that whoever is nominated still must be approved and appointed by the court.

  • A provision that the executor first pay all the decedent's debts and taxes.

  • Specific bequests — if any — to named individuals, e.g., "Daughter Sally gets my wedding ring; daughter Jane gets my gold necklace."

  • Disposition of the remainder (residue) of property, which consists of everything that remains after taxes, bills, and bequests.

Married people with children often write wills that are "mirror images" of each other: "If I die first, everything goes to my spouse. If my spouse has already died, I give everything to my children, in equal shares." Wills of this type are sometimes referred to as "I love you" wills.

2 reasons why everyone should have a will

Everyone should have a will. Even people of modest means should at least have a simple will, for two reasons:

  • To name an executor (sometimes also referred to as a "personal representative") to wrap up their affairs, and

  • To specify "who gets what" from their property, to avoid family squabbles.

The "pay all my debts and taxes" clause

The "pay all my debts and taxes" clause seems straightforward, but it frequently leads to an unsuspected problem: since many transfers of property at death take place completely outside the probate system (e.g., joint property, retirement accounts, life insurance, etc.), this clause sometimes results in one beneficiary being singled out for these expenses.

The decedent's "debts and taxes" all must come out of the "hide" of the beneficiary (e.g., a child) who inherits probate property, while other property, which may pass outside of probate to another child, is free and clear. This is one of many scenarios that make it wise at least to consult an attorney about your will.

People find that preparing a will provides great peace of mind, but they often fear that preparing one is complex. A simple will, however, is often merely a structured list of straightforward tasks designed to wrap up their affairs.

Trusts and how to craft one

A trust is a creature of the law in which one party — the trustee — has legal ownership of any form of property that has been transferred to him, her or "it" (e.g., a bank) by the person creating the trust. The trust creator is called the grantor (or settlor).

Assets of all forms can be transferred to a trust, and these assets are then invested and/or managed for the benefit of one or more beneficiaries, whom the grantor names in the trust document. Sometimes, the grantor also wears the hats of trustee and beneficiary.

Think of a trust as an empty vessel into which the grantor "pours" property. Like an executor, a trustee has the highest of legal obligations — a fiduciary duty — to manage the property, and see that it is used only in a manner, and for the purposes established by the grantor in the trust document.

Types of trusts

Trusts can be "living" — established during the grantor's lifetime, or testamentary — established in a will. Most living trusts are revocable — subject to termination or modification at any time by the grantor for any reason. As for testamentary trusts, of course, a deceased grantor is unable to change the terms of a trust created under his or her will, so these trusts are always irrevocable. (Before death, however, the grantor is certainly free to change the will.)

In order to function at all, a trust must have assets formally transferred to the trustee. Even when husband and wife serve as their own trustees, for example, real estate deeds and financial accounts must be re-titled in order to be owned by the trust. For a living trust, legal title is transferred, during life, to: "John and Jane Smith, Co-Trustees of the Smith Family Trust."

Who uses trusts?

Trusts are perhaps most commonly used by people with minor or young adult children. These folks naturally want their kids to benefit from the money and property they've accumulated in life. But if the parents die prematurely, they realize that guardianship ends at the age of legal adulthood — usually eighteen — and they don't want significant funds to be directly available to these young people until they have matured a bit. Of course, while the parents are alive, they can keep whatever strings attached to their money they feel are appropriate.

A trust can do the same thing in case of the parents' premature death. In the common case of a married couple with children, upon the death of the first spouse, usually, the survivor stays in control as sole trustee. But it is also important to have an alternate trustee already in place when the second parent dies.

The value of a trust

The trust document might authorize the trustee to pay educational expenses after high school, help with the down payment on a starter home, or virtually anything else the grantor(s) — i.e., the parent(s) — spells out in the trust. In a nutshell, the trust document can give the trustee the guidance and authority to do that which the parents would do if they were alive to do it.

Who should be a trustee?

Obviously, the trustee should be a person (or bank) with good judgment and discretion. Your lawyer can draft a trust document with almost any kind of conditions to guide, dictate or limit the use of trust funds, but you alone are responsible for finding a party willing and competent to wear the hat of trustee.

There are two very different aspects to any trustee's job — managing the assets wisely from an investment point of view, and applying the funds as called for by the trust. The choice of trustee therefore deserves more thought than it often gets.

Do you need an attorney to help with estate planning?

Many people engage attorneys to help articulate and implement their plans, including the drafting of appropriate documents.

In almost all cases, it is a good idea at least to consult with a lawyer at some point, even if only to review the plan and documents you might have prepared for yourself to be sure they comply with the laws of the state in which you live.

Beware of ambiguous language

Most people do not know exactly how to put into legal effect the general desires that seem so very clear and uncomplicated in their own minds.

Often, when laymen draft legal documents, they employ language that may indeed be clear to them but is ambiguous to others. Unfortunately, people tend to ignore (or be unaware of) limitations in their knowledge, and make financial and estate planning decisions in spite of it. Experience shows that many bitter moments occur in the probate courtroom among members of the same family engaged in a battle that could have been avoided with a little help.

Disadvantages of doing it yourself

This is not to say that all "do-it-yourselfers" are doomed to failure, especially if their situations are truly uncomplicated. Often, however, they fail to consider better options, tax pitfalls, related issues, etc. This, as opposed to total disaster, is the more likely danger to the "do-it-yourselfer," and the consequences vary from barely significant to very much so.

The role of estate planning software

Will and trust preparation software can, in many but by no means all situations, produce quite adequate results. This type of software, however, often does not fully deal with particular details, contingencies, and very specific issues that may be important to a given family. If your circumstances have any kind of "twist" to them — and most people's do — there is no good substitute for individualized, professional guidance.

Some people use will or trust software just to learn what these documents look like and to "get something on paper" before consulting a lawyer. This is an excellent idea, and these products offer quite a few educational tips and help screens.

The person who makes the estate plan is never there to see how well it works. Everything that can be done needs to be done — correctly — before death. While an attorney is not absolutely required for a good result in every case, using one is the best way to ensure that your plan is the very best possible for your circumstances.

Summary of estate planning

Estate planning is a matter for everyone, not just the wealthy.

Without a plan, state law will determine the disposition of your property at death, and intense family discord is a frequent result. The principal tools of estate planning are the way accounts and property are titled, beneficiary designations on accounts and insurance policies, as well as wills and trusts.

A great many self-help resources are available, and most people would be wise to educate themselves. But the importance of at least consulting with an attorney should not be overlooked.

It is almost always a wise idea to do so.

Practical ideas you can start with today

  • Give careful thought to the selection of your children's guardian, and discuss the matter with him or her.

  • Give careful thought to the selection of the executor of your will and the trustee of your trust.

  • Ensure that the beneficiaries designated on your various accounts and insurance policies are as you intend them to be.

  • If you don't have a will or trust, make time to educate yourself, get some ideas on paper as to your wishes, then see a lawyer.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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