Faced with creating your plan under stressful conditions is not ideal. You don’t have to wait until the circumstance is dire. It’s best to create your estate plan now and update it as your life changes. This will give you greater peace of mind and be a relief to your loved ones as well. By addressing your estate planning intentionally and with care, you can prevent confusion and disputes.
An estate plan can help you and your loved ones when you are alive and when you are dead. Below are some of the reasons you may want an estate plan:
An estate plan is something you may need in life and death. There are many elements that come into play when creating an estate plan. Some of the factors to consider include the following:
Most estate planning needs the assistance of a qualified estate planning attorney. An experienced estate planning attorney will have seen how careful planning can help a family and how missteps can cause problems. They will be the team member that will create the documents based on your wishes.
You may also want to include your financial advisor. A good financial advisor knows you, your goals, your values, and your fears and can help you think through distribution methods. They have modeled your retirement plan and can show you how long-term care needs might affect your plan in life as well as afterward for inheritors. They are also well versed on the tax implications of each account you own and how income or estate tax might affect human inheritors versus charitable beneficiaries.
Your next team member will be your accountant. Should you decide to set up a trust, this person will help you complete trust tax returns and knows the intricacies of trust income versus distributions. They can also prepare the final estate return.
Other members of your team that you will name in your estate documents include:
Power of Attorney. This person is appointed to handle your financial affairs if you are alive and unable to manage on your own. Often, the first person appointed is your spouse/partner. Successor powers of attorney may be a responsible relative, friend, or child who is good with numbers and has good follow-through. Sometimes a fiduciary organization is appointed if no other good options are available. The power of attorney ends at your death.
Health Care Agent. This is the person you choose to make health care decisions for you if you are unable to speak or decide for yourself. Most often, the person listed is a spouse/partner if there is one. Otherwise it could be a trusted friend, child, or other relative who knows how you feel about health care in a dire medical situation.
Personal Representative or Executor. This is the person who will process and distribute your estate after you have died. If there was an acting power of attorney, their duties end and the personal representative dues begin. This is often a spouse/partner or a trusted, responsible relative or your most responsible or numbers-oriented adult child. Sometimes estate planning attorneys can be personal representatives for a fee.
Guardian for Your Minor Children. If something happens to you, the guardian is the person that will raise your child(ren). If you don’t name someone, the court will appoint someone for you. The guardian may or may not be the person that will take care of any finances you’ve left behind to care for the children.
Trustee. People create trusts for a variety of reasons. Sometimes it’s to protect assets that will be used to care for minor children. Other times it’s to ensure inherited funds are spent wisely and within certain parameters. A trust can be used to protect your inheritors from losing assets due to divorce or to creditors. Regardless of the reason for a trust, a trustee will be named who will manage the assets according to your wishes. Ideally, this is a person comfortable with money and responsibility. A professional trustee can be appointed as well.
There are several components to a well-rounded estate plan. They may include the following:
Will. This document indicates who receives your assets upon your death and names the person who will handle distributing the estate (that is, the personal representative or executor). It will also name the guardian you choose to care for minor children. Note that a will won’t supersede beneficiary designations. Most assets that go through the will also will go through probate, which can take some time and expense. A will may also be designed to pour over into a trust, should you choose to set up one. An estate planning attorney will generally help you create the will and add any future changes you desire.
Beneficiary Designations. Many assets can have a beneficiary designation attached to them. Typical assets that will pass to heirs by beneficiary designation are retirement accounts, life insurance, Health Savings Accounts, bank accounts, and brokerage accounts. These can be set up as easily as filling out a form on paper or online, and beneficiaries can be changed just as easily. Note that if an account has a beneficiary designation, then distribution of the account after death will not go through a will or trust and will pass directly to the named beneficiary. Receiving the assets will require a death certificate and proof that a person is the beneficiary. These assets will not go through probate and can be transferred to heirs relatively easily.
Power of Attorney. This is a document typically created by an attorney that names the person who can help you take care of your finances if you are unable.
Health Care Directive. This document details the kind of care you would like and the lengths you want medical professionals to go through to keep you alive in the event of a medical crisis. It also names your health care agent, who can make decisions for you if you are unable. This document can be part of an estate planning package created by your estate planning attorney. Or you might find a template that you can use at your medical clinic. It can become legal in many states simply by signing it in front of two signing witnesses.
HIPPA Release Form. These are becoming more popular. You can name people who can have access to your medical records if you are undergoing care. It’s important to name your health care agent as well as any other people you would like in the loop regarding your care. Your estate planning attorney can help with this, as can your doctor’s office.
Trust. A trust is a legal arrangement in which a trustee holds and manages assets for the benefit of one or more beneficiaries. Typical assets placed in a trust include real estate, brokerage and bank accounts, collectables, and even cars. The benefits of a trust are privacy, avoiding probate, and dictating how a beneficiary might receive assets over time and under what conditions. An attorney will draft the documents for a trust. The owner is called the grantor, and the trustee is the person who oversees the trust. They can be the same person (often the case for a revocable trust).
Digital Estate Plan. A digital estate consists of all of your digital assets, which could include the following:
The digital executor is the person you nominate to manage these issues. They can be the same as your personal representative or someone different. In addition to carefully documenting digital assets and accounts, be sure your digital executor has access to account passwords.
There are several different kinds of trusts that are used for different purposes. A qualified estate planning attorney can help you determine which type, if any, might be right for you. The attorney will draft the documents.
Revocable Trust. The most typical trust we see in our office is the revocable trust. Often, the grantor and trustee are the same person. This is an estate planning tool that allows trust assets to pass privately and avoid probate, as well as allows for the grantor to dictate how assets should pass to heirs. Some parents would like their children to receive the bulk of their inheritance once they have reached a certain level of maturity. Once they have died, the trust might instruct the trustee to release income and principal to their children when certain milestones have been achieved or under certain circumstances, such as going to college, starting a business, or receiving a down payment for a home. A revocable trust can be changed at any time while the grantor is still alive. Once the grantor dies, the trust becomes irrevocable.
Testamentary Trust. This kind of trust is embedded in a will and does not exist until a person dies. Typically, people with young children will include this trust, which springs at death (or the second death, in the case of a married couple), and it is intended to provide for the children. Testamentary Trusts (trusts that are created as part of a will, detailing how the trustee manages and distributes the trust assets although the trust itself is not established until the death of the grantor) do not avoid probate.
Disclaimer Trust. This is another kind of trust that can be set up within a will and doesn’t exist until a person dies. It is generally used by married couples to reduce or eliminate future estate taxes that could occur on the second spouse’s death. Once the first spouse dies, the surviving spouse can choose to disclaim some of the assets. Assets that are disclaimed will be moved into a disclaimer trust, which can reduce future estate taxes. Depending on the language of the disclaimer trust, the surviving spouse might receive the income from the trust and may be able to access some principal according to certain circumstances.
Special Needs Trust. A special needs trust is used for heirs who have disabilities or special needs. This kind of trust will preserve a beneficiary’s eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI). Because the beneficiary does not own the assets in the trust, they remain eligible for benefit programs that have an asset limit.
Irrevocable Trust. Any revocable trust becomes irrevocable at death. In addition, some people might want to create an irrevocable trust while they are alive as part of an overall estate tax reduction strategy. These trusts cannot be changed, so a lot of thought needs to go into using this kind of trust. Irrevocable trusts are often used by very wealthy people to transfer some of their assets to the next generation during their lifetime. Doing so may avoid some future estate taxes because they’ve transferred an asset early, so the growth of the asset is not in their estate decades later. These trusts may include stipulations about when and how income and principal are distributed to the next generation.
Other Trusts. There are other trusts that are used for other purposes. A qualified estate planning attorney will be able to help you determine if you need one of these more complicated trusts.
Whether you use a trust or just a will depends on your asset base, how you want your heirs to receive assets, if there is a person with special needs that may be inheriting, how much you value your privacy, and where you live. If you own properties in multiple states, a trust is commonly recommended to reduce probate expenses after death. Some states have a very onerous and expensive probate process, whereas other states do not. Many assets can pass easily by beneficiary designation and may not go through the will or a trust. Both trusts and beneficiary designations will avoid probate. A trust is private, whereas a will is not. A trust will allow you to dole money out to your children over time, whereas a will can’t. A trust can help protect funds from divorcing spouses and creditors, but a will won’t.
Talking with your family about your estate plan is a personal decision. There can be some advantages to doing so.
If you share your estate plan with your parents, you open the door for them to share their estate plan with you. Learning your parent’s estate plan—or lack thereof—will help you be better prepared for when they need help or pass away. Knowing what your parents’ aging and end-of-life desires are in advance can help you all get together a game plan to either make it happen or alter it in a palpable manner.
You may also decide to share your estate plan with your children. If they are going to inherit significant wealth, it may be helpful for them to know so they can start to learn about money and how to responsibly manage it. If they aren’t going to receive much of an inheritance, it might be helpful for them to know that as well so they can plan to manage their own resources to meet their goals.
If you are not leaving your assets equally to your children or if you are using the estate plan to equalize earlier gifts to some of the children but not others, it can be helpful to discuss that with them in advance. That way, if they aren’t happy with the outcome, they can discuss it with you rather than be resentful of their siblings after you are gone.
At the very least, it will be helpful to communicate to your personal representative where all the documents are located. You can download a getting organized guide that will help you organize all the important information that will be needed to process an estate.
Losing a partner ranks high as one of life’s biggest stressors. It’s normal to feel fear about the unknown, experience emotional swings, or become immobilized, not knowing what to do next. We’ve worked with many widows and widowers in helping them work through the estate process and eventually create a new financial plan for themselves.
You can download Finances for One: A Financial Guide to Managing Money for Widows. The guide will walk you through the priority tasks of managing the estate and moving to a new normal. It also explains various assets and how they are taxed. Very few tasks need to be completed right away, and quite a few can be postponed until you feel ready to deal with them.
Overall, estate planning can provide peace of mind and ensure that an individual’s assets are distributed according to their wishes, their health care preferences are honored, and their loved ones are taken care of in the event of incapacity or death. Consult a financial advisor and a qualified estate planning attorney if you are ready to create or update your estate plan.
Bridget Handke, CFP® CAP®, one of the owners of Birchwood Financial Partners, has a personal mission to help people thrive. She is able to translate complex financial concepts into plain language so financial plans become easy to understand. In addition to her professional affiliations and certifications, Bridget has been quoted in publications such as the Star Tribune, Chicago Tribune and Wall Street Journal and speaks frequently on personal and women’s finance topics. Bridget believes philanthropic giving can have such a positive impact on communities that she earned the CAP® designation – Chartered Advisor in Philanthropy.