The term “estate planning” often triggers images of the wealthy who own large homes and have large stock portfolios. This, and the fact that none of us want to acknowledge our mortality often puts planning for end of life or incapacity on the back burner. The reality is that estate planning is a key component of anyone’s personal financial plan, regardless of their wealth and age. If you have put off dealing with this important planning area, now is a good time to get started. If you have a plan in place but have not reviewed your documents recently, it is time to give them a fresh look to be sure things are still set up as you wish.
Often, people assume that their spouse and other family members will automatically be taken care of, but this “planning by default” approach can trigger unintended consequences. Yes, each state has laws in place to determine where a person’s assets will go if they die without providing specific direction in a will, and there are court procedures that can be used to put someone in charge of a person’s finances should they no longer be able to handle money matters on their own due to incapacity. These court procedures, however, can be time consuming and may not lead to the outcome you would have chosen had you put your own plan in place.
A complete estate plan consists of several legal documents that specify individuals who will step into your shoes to make health and financial decisions for you should you need such assistance during your lifetime as well as individuals who will ultimately distribute your assets to your heirs after your death, following instructions you have provided to them. The documents that can come into play during your lifetime include a durable power of attorney for financial matters, a healthcare proxy, and a living will. Revocable living trusts can also be helpful in managing finances during a period of incapacity because these documents designate a trustee who can continue to manage trust-owned property both before and after death. A revocable trust can also help shorten the time it takes to distribute assets to heirs after death by avoiding the probate court which oversees the distribution of property that passes via a decedent’s last will and testament. Trusts can also be used to handle more complex family situations or when the decedent wants or needs to exercise some control over when beneficiaries are to receive their share of the estate. Note that, even if a revocable trust is in place to govern the ultimate distribution of assets, it is important to have a will in place as well as the trust document will only govern assets that have been put into the trust’s ownership.
It is common to find well-drafted trust documents in a plan but because assets have not been transferred into the name of the trust (a process known as trust funding), the estate plan has a giant hole in it. This means that assets must be put into the trust at death via the will which will involve the probate court. It is also important to understand that, whether your estate plan includes a will as the key document or a revocable trust, neither will have any bearing on the distribution of accounts that have beneficiary designations. This includes retirement accounts as well as insurance and annuity contracts. Bank and brokerage accounts may also be included in this list as it is possible to add beneficiaries to these non-retirement accounts. Beneficiary designations amount to a contract between the account custodian and the account owner that governs where the assets are to go at the owner’s death. As such, these contracts trump the provisions in a will or trust. So, it is also important to review these beneficiary designations periodically to ensure that they are consistent with the other estate planning documents.
While going without a plan is undoubtedly the biggest error in estate planning, just having documents drafted is also not enough. It is important to follow through with re-titling assets, checking beneficiary forms and making appropriate changes, and periodically reviewing the plan to make sure that it remains consistent with your wishes as your life changes.