What should your estate plan include?
In the financial planning work we do with our clients, we are often asked about estate planning issues. We have found it helpful to work alongside our clients’ personal estate attorney to identify the need for new or updated documents and assist in the follow-through of recommendations. Whether you are young and still in the prime of your earning years or a retired, more seasoned investor, all ages can benefit by articulating and documenting their wishes in the event of incapacity or death. Don’t let the courts make those decisions for you.
Most estate plans we come across include the following documents:
- Durable Power of Attorney
- Advance Directives
- Will
- Revocable Trust
- Personal letter to your family and inheritors
A Durable Power of Attorney (DPOA) provides a person of your choosing the ability to manage your financial affairs. That can include paying your expenses, managing your investments, filing income tax returns, collecting benefits and making gifts. Your designee should be someone you trust and who is familiar with your financial circumstances and wishes.
A DPOA takes effect when the document is signed and remains in place until revoked or upon death. A Springing POA takes effect only if you become incapacitated and remains in effect until your incapacity ends or upon death. A Springing POA might seem like the easy choice, but it can also create unintended roadblocks in an emergency situation and slow down the ability to make timely decisions. Both the DPOA and Springing POA terminate at your death, at which point your executor or personal representative will take control.
If you have a trust document, the named successor trustee will step in and manage the distribution of assets. The successor trustee can be a family member, trusted acquaintance or an independent corporate trustee. Each has its own merits. Family members are ideal, but sometimes there are circumstances in the trust directive that may put a family member in an awkward or compromising position.
Advance Directives cover your health care needs while the DPOA is focused on financial assets. Depending on your individual circumstances and state of residence, you may need a Healthcare Proxy (or Healthcare POA), a living will and/or a Do-Not-Resuscitate (DNR) order. The healthcare proxy lets you appoint a person to make medical decisions on your behalf, so taking the time to go through various what-if scenarios with your appointee is important so they understand your perspective and wishes.
Do you need a Will, a Trust or Both?
While a will directs what happens to your assets after death, a trust goes into effect as soon as you sign the paperwork, allowing you to direct what happens while you are alive. If you have a child under the age of 18, the will is where you would name a legal guardian for your child in the event of your death.
Trusts are a common tool to manage more complex estate planning. A Living Trust, also known as a Revocable Trust, can be created by an individual or jointly by a couple. The creators of the trust, also known as the trust grantors, typically serve as trustees and will also usually identify successor trustees to manage the assets if the grantor(s) become incapacitated or pass away. The trust grantors also name the beneficiaries of the assets in the trust document and how those assets are to be distributed. It is important to note that a revocable trust can be changed while the grantor is alive, but also that the assets in a revocable trust are not protected against your creditors.
A Pour-Over Will is a good companion to a living trust as it allows that assets not titled to the trust at the date of death are to be gathered with the pour-over will. The assets are then transferred into the trust after probate is complete and distributed according to the trust’s direction.
While a will is a simple option, estate assets covered by a will have to go through a probate process after death, which can take time and add significant legal costs. Assets held in a trust prior to death do not need to go through the probate process and can be quickly distributed according to the trust terms. Also of concern is that the probate process is part of the public record and that public record will include your will, a detail list of and value of your property along with the list of beneficiaries. Anyone will be able to pull that information from the court records. A trust provides desired privacy because the court record will only list the trust, not the assets of the trust, nor will beneficiaries be identified.
Other advantages of a trust are that the document allows the trustees to choose how the assets are managed during their life as well as managing multiple real estate holdings. Putting real estate into your trust requires transferring the deed, but that is far easier and less expensive that putting your beneficiaries through probate in several states. Additionally, some assets can be difficult to value, such as mineral rights, oil and gas rights, timeshares, etc. If those assets are handled with a will, the probate process can be very complicated and expensive.
You may be familiar with Transfer on Death (TOD) or Payable on Death (POD) designations that can be added to bank accounts, investment accounts and real estate. TOD/POD designations are convenient ways to transfer assets to beneficiaries and avoid probate on those assets. Still, a revocable trust offers a stronger plan that can cover more complicated elements for you and your beneficiaries.
It is important to understand that beneficiary designations on IRA and Qualified Retirement Plan accounts override your will and trust documents. This also holds true for life insurance and annuity policies as they have beneficiary designations as well. It is critical that you review those beneficiary designations to ensure they are up to date and align with your other estate planning documents.
A Personal Letter to your family may help to reduce the potential confusion your family may experience. Consider what information you think they would need if you were not able to give them guidance. The letter typically will include details about your assets and wishes. You may want to leave a personal, sentimental message with this letter to reinforce family history and values. The letter would allow you to explain the bequests in your trust or will, which can help prevent family discourse. This would also be a good place to leave instructions for your funeral and burial preferences and detail as to any pre-arrangements. You can also include contact information for your trusted legal and financial advisors as well as a list of accounts, life insurance, passwords, or important ongoing expenses that must be maintained during a period of incapacity. Store this confidential document carefully in a locked safe, safety deposit box or password protected file.
We suggest reviewing your estate planning documents and beneficiaries every three to five years, or anytime there is a major life event such as marriage, divorce, birth of a child or grandchild, loss of a spouse or relocation to another state.
If you do not currently have an estate planning attorney, your Meritage Team will be happy to provide references of those we have gotten to know through our experience with other clients. It is important that your selection is based on the trust and comfort you have with this person to help guide you through these essential decisions.
Deb Eveans, CPA
Comments or questions: Please contact us at 913-345-7000; or, visit our website at www.meritageportfolio.com
