Estate Planning For Everyone

Paul Hancock, CFP®    June 24, 2015

A common misconception is that the term “Estate Planning” is only reserved for the wealthy or the “1%-ers”. However, everyone should have a plan for their estate because everyone will eventually have an estate for someone to manage. There are a few essential documents that everyone should have in their estate plan. In many cases, these documents are easy to prepare and rather in-expensive.

Will

The Last Will & Testament is the most common document used by individuals to pass property and assets upon death. You’ll designate beneficiaries and appoint an executor to carry out your legal and financial wishes of your estate. If you have young children, you will designate a guardian for your children. It’s also smart to establish a testamentary trust within your will. A testamentary trust provides for the distribution of all or part of an estate. Typically, testamentary trusts are created for young children who would not otherwise be capable of managing a large sum of money such as life insurance proceeds.

Keep in mind that there are many cases where a will does not avoid an asset passing through the probate process. Assets that are held outright individually or fee simple will pass through probate (see chart below). The laws of each state vary regarding probate. Both an executor and lawyer are required for the probate process. Two drawbacks of probate are time and cost. The probate process can take time depending on the complexity and size of the estate. Probate can also be costly, typically around 3-5 percent of the total estate not including executor fees, lawyer’s fees, court filing fees, bond fees, legal and accounting fees.

The most common way to avoid probate is to setup a living trust, discussed next. Also, contracts with a named beneficiary such as a life insurance policy or retirement accounts (401k, IRA) as well as jointly held assets will pass outside of probate (see chart below).

Assets Passing Outside the Probate Process

Assets Passing Through the Probate Process

Living Trust 

A living trust is a document created during your lifetime in which one or more people are designated to manage property for someone else’s benefit. Many living trusts are “revocable” meaning the trustee has the power to change or dissolve the trust prior to death. The settlor transfers Property (real estate, bank accounts) into the trust and designates a trustee to manage the trust. Many people name themselves (or their spouse) as trustee. When you put your property into a trust, the trustee of the trust owns the property. Upon your death, assets in the trust will pass outside of probate, but are included in your taxable estate. Most states allow the assets to pass privately to your beneficiaries. A living trust can also be a very effective tool to manage assets in the event of illness, disability or the effects of aging.

Living Will

A living will or advanced medical directive allows you to specify your wishes regarding end of life decisions in case you become incapacitated. It’s important to pair this document with a Durable Power of Attorney for Health Care.

Durable Power of Attorney for Healthcare

A power of attorney is a legal document that allows someone to make decisions on your behalf. If you ever become incapacitated, you’ll need what are called “durable” powers for the person you are naming to act on your behalf. This person will oversee your medical treatment, work with doctors and other health care providers to make sure you get the kind of medical treatment you wish to receive. Some states combine the living will and the durable power of attorney for healthcare into a one document called the “advance health care directive”.

Durable Power of Attorney for Finances

A financial power of attorney gives someone the authority to handle financial matters on your behalf. Some financial powers of attorney are meant for single transactions like a real estate purchase. However, this power of attorney is meant to be very comprehensive. Your agent could do anything from depositing checks to executing trades in an investment account to filing tax returns.

 

References

Dalton Education, LLC, Estate Planning, Property Passing Outside of the Probate Process

Rocket Lawyer, “How to Make Your Estate Plan” online at rocketlawyer.com

DISCLOSURES

Past performance is no guarantee of future results. Diversification does not assure profit or protect against a loss in a declining market. While we have gathered this information from sources believe to be reliable, we cannot guarantee the accuracy of the information provided. The views, opinions, and forecasts expressed in this commentary are as of the date indicated, are subject to change at any time, are not a guarantee of future results, do not represent or offer of any particular security, strategy, or investment and and should not be considered investment advice. Investors should consider the investment objectives, risks, and expenses of a mutual fund or exchanged traded fund carefully before investing. Furthermore, the investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals.

International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Small and mid-cap stocks carry greater risks than investments in larger, more established companies. Fixed-income securities are subject to interest-rate risk. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. There are several risks associated with alternative or non-traditional investments above and beyond the typical risks associated with traditional investments including higher fees, more complex/less transparent investment strategies, less liquid investments and potentially less tax-friendly. Some strategies may disappoint in strong up markets and may not diversify risk in extreme down markets.

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