When it comes to financial planning, many people overlook the critical aspect of planning for their estate when they pass away. Over half of Americans don’t have the basic documents that comprise an estate plan, including a will, living will or medical and financial power of attorney or directives.
The importance of an estate plan cannot be expressed enough. Do you want to leave your hard-earned money to chance or to your loved ones? Establishing an estate plan specific to your individual circumstances will help streamline the settlement of your estate and ensure that your intentions come to fruition after your passing.
Why Do You Need an Estate Plan?
The primary purpose of estate planning is to preserve your wealth and try to ensure that everything you spent a lifetime achieving is transferred to the proper designated beneficiaries at the time and in the manner you chose with minimal costs, tax burdens, and the least amount of pain and suffering. (For related reading, see: 4 Reasons Estate Planning is so Important.)
No one is immune to the complications that may arise after their loved ones pass away.
One of the richest men in the world, Howard Hughes, died in 1976 intestate, leaving his $2.5 billion estate to decades of litigation, finally closing in 2010, 34 years after his death. When Elvis Presley died in 1977, his estate was valued at more than $10 million. His estate went through probate and after taxes and fees that devoured 73% of its worth, his heirs received less than $3 million.
The estate planning objectives that most people have can be grouped into two major categories: financial and non-financial. Most of us have accumulated some kind of financial wealth, that is, things that can be measured monetarily. We have also accumulated non-financial things, or personal possessions. These are items that mean a lot to us like heirlooms and family traditions. Both of these should be accounted for in your estate plan. (For related reading, see: Top 7 Estate Planning Mistakes.)
Estate planning can be a bit daunting due to the numerous federal and state laws and potential estate and income taxes. It can also get confusing as many of today’s families are split and/or combined with additional members throughout the years.
Important Estate Planning Documents to Draft and Keep Updated
Your Will: First and foremost, you should have a will and keep it updated. Make sure that it includes language that protects you against potential change in estate tax exemption amounts. Instead of naming a specific sum that will fund a trust, many estate planning documents refer to a percentage. Phrases such as “that amount,” or “that fraction,” or “that portion” are often the standard practice.
Living Will, Health Proxy and Durable Powers of Attorney: Your family members will not be left guessing your wishes if you have clear instructions that are expressed in these documents. Have a durable financial power of attorney for financial activities should you become incapacitated.(For related reading, see: Medical vs. Financial Power of Attorney: Reasons to Separate.)
Letter of Instructions: This is an important document that addresses specific personal requests not in your will. It should be opened in the case of a severe illness or post-mortem. It can be used as a roadmap that shows the locations and the details of important documents and items from safe deposit boxes to checkbooks. Remember also to safely store all of your key documents and note where they are in your letter of instructions so your heirs can find them. (For related reading, see: Letter of Instruction—Don't Leave Life Without It.)
Review of all beneficiary designation forms on all of your trusts, retirement accounts and life insurance policies. Many people feel that if they have a will, retirement accounts and life insurance policies will be distributed according to these documents. Please be aware that the beneficiaries designated on your retirement accounts and life insurance policies will override everything—including your will, trust or any other estate plan. Make sure that the beneficiaries are consistent in all cases.
Review titles on all non-retirement and non-life insurance assets. For example, joint tenants, also known as joint tenants with right of survivorship, will override everything, including your will, trust, and any other estate plan.
Who Can Help
Your Attorney: If it has been more than three years since you’ve looked at your estate plan, consider meeting with an attorney to make sure everything is in order. It is not uncommon to go through life changes that can affect your estate plan such as divorce, death, new children, grandchildren or new assets that may warrant a modification in your plan. Also, make sure your durable power of attorney and living will/advanced directives are current.
Your Financial Advisor: Uncertainty and confusion still reign supreme when it comes to estate planning. With the proper guidance and planning you should be able to take advantage of any tax saving opportunities and avoid taxing pitfalls. Remember, review and amend your plan periodically and as your objectives, acquisitions, inheritance and personal situations change. (For related reading, see: When to Update Your Estate Plan.)
Estate Planning Tax Considerations
Estate Tax Exemption Amount: In 2016, individuals can transfer up to $5.45 million of assets without owing federal gift or estate tax. Remember to check your state exemption amount as this is often different than the federal exemption.
Bypass Trust (AB trust): If you have more than $5.45 million of assets ($10.9 for married couples), you may want to consider a bypass trust (AB trust) to help reduce taxes by leaving some of your property to your children, but allowing your surviving spouse to use it during his/her lifetime. You can make the portability election on a spouse’s death to preserve the exemption as well. Remember to contact your estate planning attorney before deciding on a course of action.
Reduce Your Estate: There are several ways to reduce the assets from your estate to help reduce taxes. Besides spending and enjoying it, among these strategies are tax-free gifts, creating an irrevocable life insurance trust (ILIT) and creating charitable trusts. A knowledgeable financial advisor and estate planning attorney can help create the best plan for you based upon your individual situation.
Thinking about dying is never easy, but planning for the inevitable is necessary, especially if you want it to be as stress-free as possible for the ones you leave behind. Mistakes can potentially be avoided with proper planning and guidance from an estate planning attorney and a qualified financial professional. (For related reading, see: How to Minimize Estate Taxes with Charitable Donations.)