You already have an estate
plan
Did you know you already have an estate plan? The
only question is whether it is the estate plan you want— the one
that’s best for you and your family.
Anyone who owns assets
has an estate, whether those assets fill a 50-room mansion or a
shopping cart. Upon a person’s death, those assets must, by law, be
properly distributed. Exactly which assets are distributed to whom
depends on the estate plan. Without proper planning, a court could
determine their distribution in accordance with state law, which may
not fit the wishes of the deceased.
This brochure, prepared
by the Financial Planning Association (FPA), shows why you need an
estate plan and highlights some of the basic components of an estate
plan. A CERTIFIED FINANCIAL PLANNER™ professional, working in
conjunction with your estate planning attorney, can help you design
a sound, cost-effective estate plan that complements your overall
financial circumstances.
Why you need an estate
plan
Many people assume that estate planning is only
about saving estate taxes. Consequently, they often ignore estate
planning because they assume that their estate is too small to be
taxed. Yet increased home values, larger life insurance policies and
larger retirement accounts often make estates more vulnerable to
taxes than their owners may realize.
Furthermore, many
families assume that because Congress has reduced federal estate
taxes—and may permanently eliminate them—they either don’t need a
formal estate plan or they can delay work on one. Regardless of what
Congress ultimately decides regarding federal estate taxes, many
estates—even modest-sized ones—will remain vulnerable to state
inheritance and estate taxes.
But the main reason that
everyone needs an estate plan is that it is much more than about
taxes. Additional benefits include:
- Making sure your assets go where you want
them to go
- Controlling assets while you are alive but
incapacitated
- Controlling assets after death
- Minimizing the emotional and financial
burden on your heirs
- Minimizing feuding among heirs over your
estate
- Increasing the amount available for
charitable donations
- Avoiding the cost and delay of probate
The elephant in the
living room
Despite the benefits, estate planning is,
for many families, the elephant in the living room that everyone
avoids talking about. There are several reasons for this,
including:
- Many don’t want to face a subject that
ultimately is about mortality
- It may dredge up family conflicts
- Many don’t want to talk about money with
their heirs
- Parents don’t want to spoil the kids with
money or don’t trust their kids with money
- Many are hesitant to invest time and money
into developing an estate plan
But the elephant will not go away. Delay or
avoidance can prove costly not only from a tax standpoint, but in
unnecessary conflicts, anger, time and confusion among the
heirs.
Start with estate’s assets and your
wishes
A good way to get started is to calculate your
current net worth. Your net worth statement, sometimes called a
balance sheet, details what assets you own, in whose name, what
beneficiaries may be designated and the asset’s value. Your net
worth is the total value of these assets minus all your
debts.
The result is a snapshot of the current financial
health of your estate and provides a benchmark against which future
progress (or lack of progress) can be measured. It also shows
whether you have a potential tax problem that you need to
address.
But most important, reviewing your estate’s assets
(including your favorite easy chair and golf clubs) starts you on
the road to deciding where and how you want those assets to go. What
do you want your spouse, children, relatives or close friends to
have? Are they capable of managing it, or might a trust be
necessary? Do you want to give some of it to charity -- during your
lifetime or after death? What do you want to do with your
business—sell it or pass it to the next generation?
Once you
have a clear idea of what you want to do with your property, you can
begin exploring, with the help of your financial advisers, what
tools and strategies can make that happen with the most efficiency
at the least cost. It’s also important that this planning be done in
the context of your current overall financial
circumstances.
The four fundamental estate planning
tools
Regardless of the size of your current estate, you
generally should have as a minimum four estate planning tools: a
will, a durable power of attorney, a living will and a medical power
of attorney.
While you can save money by creating some of
these legal documents on your own with software or standardized
forms, most adults should have a competent estate planning attorney
draft the documents. For one thing, a local attorney can make sure
the will conforms to your state’s laws. A professionally drafted
will further ensures against legal challenges and the failure to
include important details. Improperly drafted or last-minute,
hand-written wills frequently are contested and invalidated in
court.
These documents often can be drafted for as little as
few hundred dollars to a couple thousand dollars each, depending on
what area of the country you live in and how simple or complex your
needs are. But preparing now can save your heirs much grief and
expense later.
A will
A will is a legal document
that details where you want your estate’s assets to go (after debts
and taxes are paid) and who is going to oversee the execution of the
will. It also may state who is to care for your minor
children.
Without a will, the laws of the state will
determine what happens to your estate’s property. Your spouse,
children or other heirs could end up with less than you planned, the
assets could be poorly managed, your children might not have the
guardian you wished, or your estate could end up paying more in
taxes and legal fees than necessary.
Keep in mind that a will
does not supersede everything else in your estate plan. For example,
if your will lists your wife to receive your entire estate, but your
ex-wife is the primary beneficiary of your life insurance policy and
retirement account, then your ex-wife would likely end up with the
benefits.
Durable power of attorney
A power of
attorney is a lifetime document for estate planning. It allows you
to designate a representative, such as your spouse or adult child,
to perform certain actions for you should you become ill,
incapacitated or otherwise unable to manage your affairs. The
representative could, for example, pay bills, sell securities or
make major financial decisions on your behalf, depending on how
broad or narrow you limit the powers. Without a power of attorney,
your spouse or other loved one would have to go through the delay
and expense of seeking approval from the court to carry out needed
financial transactions.
A living will
A living
will is an individual's written declaration of what life-sustaining
medical treatments he or she will allow or not allow in the event
they become incapacitated. For example, the person may request that
artificial nourishment be withheld if he or she is terminally
ill.
Family members or medical institutions often challenge
the meaning or validity of living wills, so take considerable care
and be specific when drafting it. States provide standard-language
forms, but some experts feel they are too vague.
A
medical durable power of attorney
This document authorizes a
person to make medical decisions on your behalf, ideally to carry
out what you’ve specified in your living will. Talk to the person
before appointing them, and be sure they understand and are
comfortable with your wishes, and will be strong enough to carry
them out even though some family members may
object.
Additional estate planning
tools
You may also need to use additional estate
planning tools depending on the size and complexity of your estate.
These tools may be useful for reducing potential estate taxes, but
they can also serve other purposes.
Trusts
Trusts
are legal vehicles for managing assets for the benefit of the trust
owner or a trust beneficiary, and are typically less vulnerable to
legal challenges than wills. Of the over 50 trusts available, not
all can or should be used to save estate taxes. The popular living
trust, for example, does not reduce estate taxes. Other purposes
that trusts can serve include:
- Managing money for an heir who is too young
or financially incompetent
- Requiring an heir to meet certain
standards, such as being drug free or graduating from college, in
order to inherit money
- Ensuring that a person’s assets go to their
children rather than the surviving spouse’s children from a
previous marriage
- Financially assisting a disabled child
without disqualifying the child for government assistance
- Reducing income taxes and providing income
for the donor while leaving more benefits for the charity
- Protecting assets from creditors
- Reducing the cost and public exposure of
probate
- Controlling the inheritance for a
troublesome heir instead of simply disinheriting the person.
Disinheritance often provokes ill feelings not only toward the
estate owner but also toward those who actually inherit.
Ownership of
assets
Who owns what assets in a family can have a
significant impact on an estate plan. For example, most couples own
property jointly, “with rights of survivorship.” Upon the death of
one spouse, the jointly owned property automatically passes directly
to the surviving spouse, avoiding probate.
While this is an
appropriate choice for many couples, it’s not the best choice in all
situations. For example, you may want property separately owned so
it can pass into a trust and take better advantage of the estate tax
exemption. You may want some property separately owned so that it
passes to the children from a previous marriage, or so that a spouse
isn’t liable for the other spouse’s debts. Proper titling also can
reduce the need for trusts.
Insurance
Insurance
can serve several purposes in estate planning:
- Liability, homeowner’s and auto insurance
can protect your estate’s assets from catastrophic loss or
lawsuits
- Life insurance can be an asset passed on to
heirs or charities
- Life insurance may be needed to pay for
estate taxes
- A small-business owner may use life
insurance to provide an equitable share to heirs who won’t run the
business
- Co-owners in a small business often use
life insurance to buy out the deceased’s estate. The ownership of
life insurance bears careful scrutiny for estate planning. Estate
owners often mistakenly own large amounts of life insurance to
help pay for estate taxes. While the death benefits are not
subject to income tax, they may be subject to estate tax.
Consequently, the insurance benefits earmarked to pay estate taxes
on other property end up themselves being taxed. One strategy
around this is to use an irrevocable life insurance trust, in
which the estate owner is the insured but the policy is actually
owned by the trust and thus generally not included in the
insured’s estate.
Less
expensive strategies
If estate taxes are an issue, keep in
mind less expensive tax strategies than say a trust or buying life
insurance. For example, you can give away $11,000 (indexed for
inflation) every year to each person you choose, free of gift tax. A
couple could give a grandchild $22,000 a year, for example. You also
can pay the tuition bill or a medical bill for a favorite grandchild
or niece free of gift tax, as long as you pay it directly to the
institution.
Business owners
Estate
planning is essential to anyone who owns a business because
typically the business is the largest asset in the owner’s estate.
Again, this is not just an estate tax issue. Only four in ten family
businesses survive after being transferred to the next
generation.
While estate taxes sometimes play a role in this
failure, more often it is due to lack of good succession planning.
The owner, for example, fails to groom a qualified successor or
tries to divide the business evenly among the heirs, causing control
conflicts. Sometimes the best decision is to sell before death and
not pass on the business. Like other aspects of estate planning,
succession planning involves the issue of mortality and family
conflict, therefore planning is frequently postponed until it is too
late.
Discuss your estate plan with
family
As in the case of a family business, or any
estate for that matter, the owner can dramatically smooth the
passing of the estate’s assets by discussing the estate plan in
advance with the heirs. Heirs, stressed by the loss of a loved one,
frequently feel uncomfortable, even guilty, about receiving an
inheritance. Good planning and prior discussion can relieve much of
their anxiety about receiving and managing the
inheritance.
Keeping your estate plan a secret can also spark
a bitter feud among the heirs over the distribution of the estate’s
assets. An AARP study found that one in five people over the age of
50 have experienced family conflict concerning inheritance
issues.
Explain to heirs why you’ve made certain decisions,
especially if it isn’t a simple matter of dividing liquid assets
such as cash and stock evenly among them. Who will run the family
business? Who gets the vacation home? Who receives which heirlooms
and memorabilia? Listen to their feedback and revise plans, if
appropriate.
Explaining your living will and medical power of
attorney can minimize inter-family conflicts over your medical
treatment should you become terminally ill, as well as minimize
family anxiety about your wishes.
The most important
letter you may ever write
A simple letter of
instruction, written in tandem with your will, may be the most
important letter you will ever write. Not only will it provide your
immediate family with information they may need, it also ensures
that your affairs will be handled as you wish.
The letter may
include:
- The type of funeral you prefer and any
prearrangements you made with the funeral home and/or minister
- The contact information for each of your
insurance policies including Medicare
- A financial statement listing your accounts
and any outstanding loans
- The location of important papers and the
key to your lock box or combination to any locked containers
- Persons to contact such as relatives,
friends and advisers
- An obituary listing your name as you wish
it written, including nicknames, place and date of birth,
immediate relatives and any noteworthy accomplishments
When you complete your letter of
instruction, inform someone close to you where you are keeping it.
Except for an occasional update, forget about it and enjoy life,
knowing all is in order.
Keep organized financial
records
Perhaps heirs find nothing more frustrating at a
time of grief than digging through disorganized and incomplete
financial records. Keeping good records—what assets you have, where
they are located and how to get in touch with the appropriate
financial advisers—can save your heirs immense headaches, reduce the
chance of costly errors and ensure that all assets and debts are
accounted for.
Take care to document the cost basis of your
assets. The cost basis is what you paid for an asset, plus possible
adjustments. This will become particularly important should the
estate tax be replaced with a capital gains tax on assets passed to
heirs.
Review your plan
periodically
Review your estate plan
regularly—particularly such components as wills and trusts. Tax laws
change, personal circumstances change and your net worth may
increase or decrease, necessitating revisions to your
plan.
Coordinate your estate plan with planner and
attorney
While some CFP professionals are qualified
estate planning attorneys, most planners work with outside
attorneys. Both professionals need to work closely together because
it’s important that the estate plan and any accompanying legal
documents work in tandem with other elements of your overall
financial plan, such as investments, saving for retirement or
putting children through college.Is
your estate in order? Use our Estate Planning Checklist to find
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