Estate Planning 101 (the very basics)
The Masking Tape Inheritance
My husband and I recently visited my in-laws' home. While helping them move a painting, I noticed a set of initials written on a piece of masking tape on the back of the painting. My father-in-law explained that those were my sister in-law's initials, indicating that she would inherit the painting. He then took me over to an antique coffee grinder where he showed me my husband's initials. Apparently these masking tape markers exist on many of their art pieces and antiques. As I've said before, an occupational hazard of being a financial adviser is that you often turn everyday conversations with family and friends into a mini-financial planning session. This interaction with my father in-law prompted me to ask him if, in addition to the masking tape method, they also have an updated estate plan in place. To my relief, his answer was "Yes."
Clients visit our office for the first time thinking they need help with investments and retirement planning. What they don't realize is that they also need help with their estate planning. Disclaimer: We are not attorneys; but we often help our clients think through how they would want their assets to pass after their death. No matter your age or size of net worth, every adult should have at least some basic estate planning documents in place - and in many cases, more sophisticated planning is needed.
Here is a summary of the documents most adults should have in place:
At the most basic level, a will names a guardian for children and distributes your assets through a court process called "probate." Completing a will is the best way to ensure your wishes are fulfilled and avoids leaving decisions up to the courts. You will name an executor who will be in charge of making sure the terms of the will are carried out. Wills may also direct the distribution of personal effects. If you are my father in-law you can take the masking tape route, although keep in mind that tape can easily be 'changed' 🙂
Financial Power of Attorney:
This document allows your named agent to make financial decisions for you while you are still living. These can be drafted so the powers "spring" into action when you become incapacitated, or become valid as soon as they are signed. In many cases spouses will use a durable power of attorney, which allows their spouse to sign for them in their absence or if they were to become disabled. In other situations, you may want the power of attorney to be in effect only if you are incapacitated. Make sure that your agent is not only trusted, but also has the aptitude and interest to manage your finances.
Healthcare Power of Attorney:
This allows your agent to make medical decisions for you if you become incapacitated. Name someone who will follow through with your instructions and who will remain calm in an emergency situation. Many times spouses are also named in this role --but not always, if you don't feel they'll able to carry out your wishes.
NOTE: It is important to have your adult children sign a financial and health care power of attorney as well so that you are able to make financial and health care decisions for them if the need arises. This is especially important if you have adult children away at college.
Living Will :
A living will directs your agent and health care providers regarding end of life decisions if you cannot speak for yourself. If not in place, medical providers must make every effort to keep you alive. Many of us would not want that; and a living will allows you to specify in what circumstances you would want life sustaining efforts.
Revocable Living Trust:
In some cases, a will is adequate to direct assets after your passing. However, in situations where more sophisticated planning is necessary attorneys recommend creating a Revocable Living Trust (RLT). Although there is a bit more work up front to create a RLT, it gives you more flexibility when distributing your assets and is oftentimes more accepted by financial institutions than a Financial Power of Attorney. Whether to create a trust or not is highly specific to your situation. Here are a few reasons to consider using a RLT:
- You have substantial assets outside of retirement accounts.
- You own property in multiple states.
- Minor children would be beneficiaries of your assets.
- One of your beneficiaries is or could someday be disabled.
- You are single and have assets outside of retirement accounts.
- You are in a second marriage and each spouse may want different beneficiaries.
- You seek asset protection for your children to protect against future divorce, litigation or bankruptcy.
- A host of other reasons your attorney will discuss with you.
Here is how it works: A RLT is a separate legal entity created by you to hold certain types of property, e.g. your non-retirement accounts and real estate. It is used during your lifetime, can be modified and terminated by you. Any income and taxes flow through to your personal tax return. You will be the trustee of your trust during your lifetime and name a successor trustee to act in the event of your incapacity or death. At a basic level, the benefit to a RLT over a will is that assets flowing through a trust avoid probate after death, which is less costly and time consuming for your heirs. The trust can also give very specific direction as to how assets can be used after your death and can name a trustee who will manage assets on behalf of children. You can also utilize a provision to create a special needs trust now or in the future.
As with many items related to financial planning, you should discuss these issues with your close family members. Make sure they understand your wishes and know where the documents are kept. At a minimum, each of your agents should be aware of the roles that you've given them.
If you have documents in place, take a minute to recall who your named agents are. Are they still appropriate for that role? If you can't remember who they are, there's a good chance you should take the time to review, and potentially visit your attorney for an update.
Although masking tape is good for a lot of things, it isn't the best tool for estate planning. Be sure to work with an attorney who specializes in estate planning and include your financial adviser in the process.