Estate Planning: Life Events Should Prompt You to Consider Reviewing Your Strategy
Death isn't usually something we like to talk about — or even think about — but it's coming for all of us anyway. What will happen to your assets when you pass away? If you are like two out of three Americans, you don't know. That's a problem, but it's one you can solve.
Let's explore how you can create a clear, effective, and powerful transfer of wealth to the next generation.
Estate Planning 101
Estate planning is the process of preparing and organizing your financial and legal affairs to ensure that your assets are distributed in accordance with your wishes after you die. It can involve creating a will, setting up trusts, designating beneficiaries for retirement accounts and life insurance policies, and more.
Regularly reviewing your estate plan is crucial to ensure that it reflects your current circumstances and wishes. Life events such as marriage, divorce, significant increase in assets, the birth of a child, or the death of a loved one can all have a significant impact on your estate plan. Failing to update your estate plan after these life events, on the other hand, can lead to unintended consequences and disputes among your heirs.
Who Needs an Estate Plan?
Estate planning is not just for older people, wealthy people, or sick people. Every adult needs an estate plan. None of us know when or how we will pass away. And none of us want our family or friends stuck in probate court trying to sort out who gets what from our assets.
In general, estate planning is simple and straightforward. In most cases, though, a financial advisor and an attorney can help you think through the process and, in some cases, make your plans better and easier for your heirs.
Common Legal Documents for Estate Planning
The most common legal documents used in estate planning include:
Will: This is a legal document that outlines how you want your assets distributed after you die.
Trust: A trust is a legal entity that can own property and hold assets for the benefit of your beneficiaries. It will include instructions on how you want those assets distributed after you die.
Power of attorney: This document appoints someone to make financial or medical decisions on your behalf if you become incapacitated.
Advance directive or living will: This document outlines your wishes for medical treatment in case you become unable to communicate them yourself.
Let's consider each of these documents in more detail.
The Will
The cornerstone of most estate plans, a will is a primary document that states who your heirs are and what they should inherit. It also allows you to appoint an Executor, who is the person that will manage the remaining financial affairs after you die.
Many people don't realize, however, that a will does not determine the disposition of certain assets, such as those in a trust, annuities, life insurance, or retirement accounts. Those need their own beneficiaries.
You may also name a legal guardian for your minor children if something happens to you in a will.
The Trust
Trusts allow the management of assets on behalf of a beneficiary. It states who those beneficiaries are, what they should inherit, and who will manage and distribute those assets after your death. Most people use trusts to control their wealth, protect their legacy, and/or avoid probate. Trusts come in many varieties, including revocable and irrevocable trusts, testamentary trusts, and special needs trusts.
Revocable trusts: These trusts can be modified or revoked during your lifetime and are often used to avoid probate.
Irrevocable trusts: These trusts cannot be modified or revoked and are often used for tax planning or asset protection.
Testamentary trusts: These trusts are created by your will and take effect after your death.
Special needs trusts: These trusts are designed to provide for the care of a loved one with special needs without jeopardizing their eligibility for government benefits.
The Power of Attorney
A power of attorney is a legal document that gives someone else the right to act on your behalf in legal or financial matters. The person who gives the power of attorney is called the principal, while the person who acts on the principal's behalf is called the attorney-in-fact or agent. The attorney-in-fact can be authorized to make decisions related to banking, investments, real estate, healthcare, taxes, and other legal matters.
A power of attorney may be used to grant immediate authority, or to do so upon a medical emergency or decline in mental functioning. In addition, making it a durable power of attorney ensures the authority remains in effect if you principal become incapacitated.
The Advanced Medical Directive (Living Will)
An advanced medical directive is a legal document that outlines a person's wishes regarding their medical care in the event that they become unable to make decisions for themselves due to illness or injury.
This document allows individuals to specify what treatments they would or would not want to receive. It may also include your medical power of attorney, which, as mentioned above, is used to appoint an agent for medical decisions should you become incapacitated. An advanced medical directive and a living will are not always the same. The advanced directive can be a more comprehensive document that includes a living will, medical power of attorney, and other important medical information.
The Benefits of Estate Planning
By planning your estate now, you can help avoid disputes among your heirs, minimize taxes, protect your assets, and provide for your loved ones after your death.
You can also make sure that someone you trust will make medical and financial decisions on your behalf if you become incapacitated. If you have minor children, you can name their guardians and help cover the costs of raising them. Part of protecting your children and your assets is being prepared - estate planning is a great place to start
The Benefits of Life Insurance
A good term life insurance policy should provide income replacement should you pass earlier than expected.. Your beneficiary will receive the payout in a lump sum upon reporting your death to the insurance company. A life insurance policy can help your spouse, children, or other dependents keep the bills paid, the refrigerator full, and the house maintained.
In some cases, life insurance is not part of an estate which can reduce the chances of estate taxes. However, suppose you’re not concerned about estate taxes. In that case, you may name your estate as the beneficiary, which may be helpful if you plan to create a testamentary trust with the life insurance benefits. Be sure to consult your attorney or financial advisor to determine what is best for you.
The Benefits of Creating a Will
Creating a will is a critical component of estate planning. It helps ensure that your assets are distributed according to your wishes and names an executor to carry out those wishes. A will can also simplify the probate process. If you die intestate, that is, without a will, a court will determine who receives your assets and who will serve as guardians of your minor children.
Remember, your will only applies to assets that do not already have a named beneficiary. In other words, life insurance, retirement accounts, or assets in the name of your trust are not directed by your will.
The Benefits of Creating a Living Trust
A living trust is a popular estate planning tool.
Trusts can help you avoid probate and preserve your privacy since it is not subject to public record. Probate can be an expensive and timely process depending on the state you live in - if you live in California this is certainly the case. If you have minor children, dependents with special needs, or other beneficiaries who may not spend their inheritance with care, a trust may be the way to go.
Trusts can get complicated — quickly. It can be as complicated or simple as you would like. Either way, it can be important to discuss the benefits and drawbacks of a trust with your financial advisor and a trusted attorney.
Strategies for Establishing and Protecting Your Assets in an Estate Plan
When establishing an estate plan, it's important to work with an estate planning attorney and experienced wealth manager who can help you navigate the complexities of the law and your options. Some strategies you may consider include:
Establishing a trust to hold and manage your assets.
Coordinating your beneficiary designation to effectively accomplish your goals.
Considering the creation of irrevocable trusts to help protect your assets, either now or at death.
Transferring assets to family members or other trusted individuals while you are still alive.
Using retirement accounts and life insurance policies to provide for your loved ones after your death.
The Tax Implications of Estate Planning
Will your heirs owe taxes on what they inherit from you? - It depends on the size of your estate.
The federal estate tax, sometimes called the death tax, sounds a lot more frightening than it is. In 2023, you would only have to pay this tax if your estate exceeded $12.92 million if you are single or $25.84 million if you are married. In most cases, widows and widowers keep the couple's higher exemption limits.
When taxing an estate, the IRS exempts the $12.92 million and then taxes the remainder using a progressive scale.
Common Life Events That Should Cause You to Review Your Estate Plan
Several life events should prompt a review of your estate plan, including:
Marriage or divorce
The birth or adoption of a child or grandchild
The death of a spouse or other close family member
A significant change in your health or that of a beneficiary
A significant increase or decrease in your assets or income
Moving to a new state or country
A change in the law
A change in your business or financial interests
When you review your estate plan, it's best not to do so alone. Talk with your spouse, your attorney, and your financial advisor. At Cooke Wealth Management, we’re here to help you navigate the complexities of the law and develop a plan that meets your needs and goals. Give us a call to set up an appointment.