A common question financial planners often hear is “do I need an estate plan?” The short answer is yes but putting together an estate plan is often a lot less involved than most people think. When the subject of estate planning comes up, many people believe that implies setting up elaborate trusts and the subsequent attorney costs that come along with them. While, for some individuals and families, trusts may be an appropriate solution, for many estate planning can be a lot less involved. So what does estate planning really entail?
Estate Planning Components
On the most basic level, estate planning refers to the preparation of tasks that serve to manage an individual's financial situation in the event of their incapacitation or death. In other words, if you can’t manage your stuff, who does? And when you die, who gets it?
The first component to consider is if you are living but become unable to manage your own affairs, both financial and/or regarding your health, then who should do so in your place? One way to set up these parameters is through powers of attorney (POA) for property and for health care. In a POA, you nominate who you would like to make decisions on your behalf (often referred to as the agent) should you become incapacitated. Within these documents you can limit the scope of the power the agent holds and when they have these powers. The POA for property and the POA for healthcare are separate documents, and the agent named does not need to be the same individual for both documents.
The next component to consider is what should happen to your assets when you die. For financial assets (bank accounts, investment accounts, retirement accounts, etc.), how these assets pass can often be directed by naming beneficiaries on the accounts. Workplace retirement plans, Individual Retirement Accounts (IRAs), and life insurance typically ask for beneficiaries to be named when the accounts or insurance policies are established. Other accounts, such as brokerage investment accounts and bank accounts, allow for beneficiaries to be named through a Transfer on Death or Payable on Death registration. Joint ownership of an asset with rights of survivorship can also direct who gets an asset when you pass, although state laws vary when it comes to joint ownership so you may need additional guidance if considering doing so.
Probate and Beneficiaries
For many, avoiding probate is a goal as the process is public information and there can be costs associated with going to court. Trusts are legal documents drawn up by an attorney that can direct the distribution of your assets while avoiding probate, which is why many people think they need to establish trusts. However, trusts are not always necessary. One way to avoid probate is through proper beneficiary designations as mentioned above. Beneficiary designations supersede what your will or even a trust directs. For example, if you name your brother as the beneficiary of your IRA, at your death your brother receives the IRA regardless of how your will or even a trust document says your assets should be distributed. Beneficiary designations are also not subject to the probate process. This is why it is important to review your beneficiaries every so often or in the case of a major life event such as marriage, children, or death of a family member. Joint ownership with rights of survivorship typically will also avoid probate. For example, in Illinois, a common way to own your primary residence with a spouse (and only a spouse) is through a version of joint ownership called tenancy by the entirety. With tenancy by the entirety, when one spouse dies, their interest in the property is automatically transferred to the surviving spouse, thus avoiding the home having to go through probate. Many states allow for the probate process to be avoided if the only assets remaining that don’t pass directly through beneficiary designations or joint ownership are under a certain value. For example, probate laws in Illinois hold that if the value of the estate is less than $100,000, then probate may be skipped.
Trusts are often the next step in an estate plan. While there is cost associated with having trusts created as they must be drawn up by an attorney, for some, the cost of doing so is worth it as there is potentially more control over asset distribution, privacy, and avoidance of probate. While beyond the scope of this article, if estate taxes are a potential issue, trusts can help minimize them as well.
Of course, this is not intended as legal advice and if there are any questions as to what is needed in your estate plan a professional should be consulted. But, for many, by creating POAs and a will along with making sure all financial assets have a beneficiary named or are owned jointly (when appropriate), many individuals can establish and implement their estate plans effectively.