What is Estate Planning?
Key Points:
• Estate planning is the process by which an individual sets up procedures to control the fate of their assets, arrange for ongoing medical care, designate powers of attorney (POA), minimize taxes, and build their legacy.
• Estate planning is not just for the very wealthy or the very old. Regardless of the size, everyone has an estate, and therefore everyone can benefit from some level of estate planning.
• Estate plans are not inert documents, and include but are not limited to wills. Estate plans encompass a number of documents, accounts, procedures, and more, and should be updated on an ongoing basis.
• Individuals with particularly complex estates tend to benefit from the guidance of financial advisors, who are intimately familiar with the estate planning process, and who know how each element applies to their clients’ unique situations.
Estate planning is how an individual sets up procedures to control the fate of their base of assets in the event of their incapacitation or death. An individual’s estate is made up of anything and everything of value in their possession: cash, stocks, bonds, vehicles, real estate, jewelry, art, clothing, and more. While an individual is still of sound mind, these and other items related to the individual’s wishes must be accounted for, and a plan must be put in place to determine their bequest after the individual dies.
But estate planning is not just about the bequest of assets. It also includes planning for medical care in the event of incapacitation or disability — if the individual goes into a coma, say, and can no longer make choices on their own behalf. Individuals must also decide who will get power of attorney (POA) for financial and medical matters (often two different people), and who to name as a will executor. Indeed, successfully completing the areas of estate planning that require the participation of others means finding a handful of close, trustworthy individuals. Picking the right people means an estate will be handled in a timely fashion, commensurate with the decedent’s wishes; picking the wrong people could result in a slew of unsavory consequences.
Despite the connotations of wealth in the term “estate,” the reality is, everyone with any assets at all has an estate, and therefore needs an estate plan. However, the estate planning process varies; people with small, simple estates may be able to cover everything in a will — the most fundamental element of any estate plan — whereas people with large, complex estates almost certainly won’t. In the latter case, a will is an integral jumping-off point, which is then often complemented by various types of trusts, funds, charitable giving plans, tax efficiency plans, and more.
Additionally, the sooner an individual begins the estate planning process, the better. Those who begin earlier in life tend to be in better shape as time goes on. Rather than having to generate a complicated, far-reaching estate plan from scratch, their existing estate plan can simply be modified and amended at each significant life milestone. To this point, estate planning is an ongoing process, not a one-time exercise. Estate plans should be reviewed and updated on a consistent basis to ensure that all assets are accounted for, beneficiaries are current, and wishes are accurate.
Depending on the complexity of an individual’s estate, they may well benefit from the help of a dedicated estate planner. Estate planning often constitutes a subheading of a financial advisor’s responsibilities. The benefits of working with a fee-only, fiduciary financial advisor are numerous, particularly as relates to the sensitive field of estate planning. Throughout the process, expertise and trust are the two factors most integral to thoroughness and success. Financial advisors are deeply familiar with the federal and state regulations impacting their clients’ estate plans, and can help them engineer plans that are true to their wishes, reduce the taxes and fees incurred at death, and set up a legacy for generations to come.
What Constitutes a Thorough Estate Plan?
Particularly for individuals with large estates which comprise a variety of asset types, thorough estate plans have a number of crucially important components. Of course, there is no one-size-fits-all approach to estate planning, and so if you find yourself in a complicated situation, it’s best to solicit the help of a trained advisor.
Will:
A will is a legal document which includes elementary instructions on how, after death, an individual would like to distribute their property and arrange care for their minor children (if they have any). The individual records a detailed account of these wishes in the will, then names a trustee who, upon the individual’s death, will become the executor of the will. The trustee is expected to act in a fiduciary capacity on behalf of the decedent, and as such, they must be someone in whom the decedent has placed a good deal of trust.
Upon the testator’s death, their will enters probate, a court-supervised procedure in which the authenticity of the will is either confirmed or refuted, outstanding taxes, debts, and credits are paid through the decedent’s estate, and then remaining assets are distributed to beneficiaries according to the decedent’s wishes. The custodian of the will must take it to probate court within 30 days of the decedent’s passing. Once they do, creditors have a limited amount of time to make claims on the estate before the assets pass to the named beneficiaries.
A will is the most commonly known element of an estate plan, and so there’s a common misconception that it, in itself, constitutes a comprehensive estate plan. This is rarely the case. Particularly for individuals with large estates who want to minimize the tax-triggering events surrounding death, a will is a necessary place to start, but only the beginning of the plan.
Establishing Directives:
“Directives” is the legal term for your “wishes” — guidelines about an array of areas related to your estate. One directive is the establishment of revocable living trusts, which, if created and funded successfully, can make it such that certain of your assets can bypass the costly probate process, passing directly to your beneficiaries.
Medical care also falls under the heading of establishing directives. This includes your own future medical care in the event of your incapacitation, for which you’ll need to grant medical POA to a trusted associate. This can also include care for your minor children, particularly if they suffer from disabilities (in which case, too, a revocable living trust may be appropriate, as too great an inheritance could price them out of precious government benefits).
Other POAs — durable POA, in which the named individual may legally act entirely on your behalf; and/or limited POA, in which they may act on your behalf in certain circumstances only — is also included in the establishment of directives. Again, it cannot be stressed enough that individuals granted POA should be carefully chosen, and should understand all of the responsibilities that come with the designation.
Beneficiary Review:
In short, beneficiary review means going back over who’s getting what, and making sure it’s still consistent with your wishes. This may seem like a relatively simple process, but there are a host of factors that influence beneficiary designations. Sometimes, there are compelling reasons not to re-divide assets in some uneven way, to reallocate certain assets to nonprofits and/or charities, or to make even more granular distinctions for the sake of tax efficiency.
Beneficiaries need to be checked and updated on a consistent basis. It may seem easy to determine exactly who gets what with finality, but life is defined by variability. Divorces, changes of location (and pertinent tax laws), new professional dynamics, and more can all have an impact on who should receive what portion of an individual’s estate. It is far from uncommon for beneficiary designations to still be out of date at the time of an individual’s death, and for lengthy, costly legal battles to ensue.
Continuous Reassessment:
To pick up on that point, all facets of an estate plan should be reviewed on a regular basis — many recommend annually — to verify that they are pertinent and up to date. In addition to regular meetings with advisors, individuals may schedule ad-hoc meetings in the event that their lives change in some significant way — new home, new job, expanding family, tuition costs, etc. All of these factors will influence the structure of an individual’s estate plan, and so all advisors should be kept in the loop at all times.
Whose Help Do I Need to Create an Estate Plan?
All estate documents require the authorization of estate attorneys, but many individuals benefit from the expert guidance of financial advisors. Financial advisors offer a multitude of upsides, especially for individuals with large, complex estates. Fee-only advisors in particular are especially appealing, as the estate planning process takes a long time to perfect, and the hourly rates of other advisors may prove unnecessarily costly.
Additionally, financial advisors often have deep knowledge and experience with all the factors included in good estate planning. Better yet, financial advisors work closely with their clients in a holistic capacity, understanding all the ins and outs of their family dynamics and financial objectives. Unlike estate attorneys, who work in comparatively limited capacities with their clients, financial advisors can incorporate all of this information into their estate planning recommendations.
As you can see, estate planning can be an extremely complex, ever-changing process. It concerns some of the most sensitive human topics — death, family, and legacy. The difference between a good estate plan and a poor estate plan can mean the difference between family harmony and family tension; a legacy that adheres to an individual’s values and missions, and a mistaken, incommensurate legacy. For the most effective, exhaustive, tax-efficient estate planning help, it’s often best to seek out the guidance of a trained professional.