Estate Planning

Seven Key Elements of Estate Planning

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by Alli Thomas

Feb 19, 2019

A recent study of 3,000 adults age 55 and older by Merrill Lynch and AgeWave revealed that 45% of those surveyed have no will. The research also found that only 18% have a will plus two other crucial estate-planning documents – a living will and a durable power of attorney.

 

Most people agree that, in theory, estate planning is a necessary task regardless of wealth. But it still tends to be an uncomfortable process for many people, as it involves confronting your own mortality – not to mention having some potentially difficult conversations with family members.

 

Here a quick look at seven key elements of estate planning:

 

Will

 

A will is a legal document that outline how you would like your assets to be distributed after you die.

 

When you write your will, you also assign an executor. This person will be tasked with carrying out your wishes. Writing a will also allows you to direct exactly how your property is distributed.

 

Some assets, such as life insurance proceeds, retirement plan accounts, and some annuities, will simply pass to the named beneficiaries. Titled assets such as real estate and vehicles typically have to be passed through a court proceeding and a court order, however.

 

Probate

 

If you die without a will, your assets will pass through probate – a court-led process to administer your estate. While laws vary by state, the probate process typically looks like this:

 

  • The case is initiated in court
  • The court determines that the decedent had no will and appoints an administrator (usually a family member of the decedent) who then must gather the assets, identify heirs and notify the decedent’s creditors
  • The administrator liquidates assets to pay debts, taxes, and administrative costs. Only after these expenses are settled are the remaining assets (if any) distributed.

 

The probate process tends to be lengthy (two years or more) and expensive, as the administrator must receive court approval before every action.

 

Trust

 

Trusts are legal documents that set forth the rules and requirements for your beneficiaries to receive your assets, usually with some favorable tax treatment, to avoid the probate process.

 

There are many types of trusts. They may be revocable (able to be modified by the trust owner or grantor) or irrevocable (unable to be modified without the permission of the named beneficiary or beneficiaries of the trust). If you have minor children or grandchildren to whom you would like to bequeath money (or a beneficiary who may not have the best money-management skills), you may want to consider establishing a trust. You must assign a trustee to act as a fiduciary to administer the trust.

 

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Life Insurance

 

Life insurance proceeds can replace earnings, protect wealth, pay debts or cover education or daily living costs for your dependents. The most straightforward policy pays proceeds in a single tax-free lump sum to your beneficiary; however, there are many other payment options available.

 

If you wish to ensure that the proceeds of your policy pass to beneficiaries without going through the probate process, you must ensure that at least one named beneficiary survives you. Otherwise, those proceeds will (in most cases) be used to pay your final bills.

 

Power of Attorney

 

Power of attorney (POA) gives someone the authority to make certain financial decisions for you if you become incompetent or incapacitated and are unable to make such decisions yourself. POAs can be durable, meaning they are effective immediately and continue in effect if you become incapacitated. Springing POAs are only effective after you become incapacitated.

 

One important aspect of estate planning that is often overlooked is granting POA for your retirement assets. Specific language must be included in your POA documents to allow the person(s) named to manage your retirement accounts on your behalf if you become incapacitated. Also important to note is that your plan beneficiaries do not have POA unless your POA document explicitly states this.

 

Living Will

 

Living wills are also known as advanced medical directives, healthcare power of attorney, or designation of healthcare surrogate. It is an outline of your wishes regarding what medical care and procedures you do or do not want to receive if you become critically ill and are unable to speak for yourself. They also cover palliative and end-of-life care, as well as whether you wish to donate your organs after death. A living will does not appoint anyone to speak on your behalf, it simply allows you to state your wishes in advance.

 

Living Trust

 

Living trusts, which are often confused with living wills, are a legal entity in which you are typically the owner (or grantor), the beneficiary, and the trustee (in the case of a revocable living trust). As the grantor, you create a living trust and transfer your assets into the trust’s ownership. As trustee, you manage, invest and spend the living trust for the benefit of the beneficiary (which is also typically you); however, you may want to name a successor trustee in the event you become incapacitated. Depending on your assets, you may not need a living trust.

 

Understanding how these different elements of estate planning work and making the best choices for your individual situation can be confusing and frustrating. Our advisors are experienced in estate planning and would love to help you navigate these important decisions. Click here to request a no-cost, no-obligation consultation.

Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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