Estate Planning Articles

Seven Key Elements of Estate Planning

by Alli Thomas

Aug 31, 2022

Most people agree that, in theory, estate planning is a necessary task regardless of wealth. But it 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 

Many people also aren’t aware of the various estate planning tools that are available for protecting their wealth or the processes involved. 

Here a quick look at seven key elements of estate planning that you need to know about: 

Will

A will is a legal document that outline how you would like your assets to be distributed after you die. Your will is almost certainly the most important estate planning document you can have when it comes to ensuring that your wishes are honored after you pass. 

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. 

Protect you will from a potential contest 

Emotions can run high after a loved one’s death and if one or more of your heirs believes they weren’t treated fairly, they may decide to contest your will. When writing you will, it’s important to take steps that help ensure that it will hold up in court if they do.   

Who can contest a will?  

Only your spouse, children, and people named in your will are able to contest your will and they can only do so for legitimate reasons such as your incapacity or fraud. Heirs can’t contest a will simply because they don’t agree with your final wishes, or if their feelings are hurt about how you decided to distribute your assets.  

How can a will be protected? 

Here are some tips to help your heirs avoid a will contest:

1. Set up your will properly.  As is the case with almost all legal matters, creating a will is NOT a DIY project. Here are some of the things to include in your will:

  • The full names of all your intended heirs.  
  • The names of anyone you want to specifically exclude.  
  • Your will should name both an executor and alternate executor.
  • If you have minor children, your will should name their guardian(s).  
  • In most cases, you must sign your will in the presence of two independent witnesses

2. Review your will often. As your life circumstances shift, your wishes may, too. Make sure that you look over your will at least annually and as your health conditions change.

3. Remember the in terrorem clause. Otherwise known as the “no-contest” clause, it is designed “scare” your heirs away from the idea of fighting over your final wishes. Under this clause, if an heir contests your will and loses, they will get nothing at all. Note, however, that there are different implications depending on the state you live as in some states, a no-contest clause isn’t enforceable if there is probable cause (for example, if you were under undue influence when you executed the will).

4. Talk to your family about your will. If you’re married, be aware that many states will not let you disinherit your spouse (although you may do so with siblings, children, grandchildren, and other family members). While discussing your final wishes may be an uncomfortable topic, it can save a lot of drama for your family after you’re gone.

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, probate 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. Your estate plan should be designed in a way that helps your heirs avoid dealing with probate. 

Trust

Trusts are legal documents that set forth 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 that can be used for estate planning.  

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. 

Read more: The Spendthrift Trust: An Estate Planning Tool That Protects Your Heirs from Excess Spending 

Life Insurance

Life insurance proceeds can replace earnings, protect wealth, pay debts, 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 probate, 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. This is another reason why it is important to regularly review your estate plan and update beneficiary designations as needed. 

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.

Specific language must be included in your documents to allow the person(s) named to carry out your wishes and manage your retirement accounts on your behalf if you become incapacitated. It is important to note that your plan beneficiaries do not have Power of Attorney unless your document explicitly states this. 

Three Key Details About Power of Attorney 

The person assigned becomes an agent who is legally required to act in the best interests of the person they have Power of Attorney for, including not using the money on themselves. Here are three key details to keep in mind:

1. POA can be granted in two scopes:

  • General, which provides control of all accounts to the extent legally possible. 
  • Limited, which grants a more limited scope of authority. 

Note that many financial institutions will not honor a generic Power of Attorney and will require completion of their own documents.

2. POA can come into force in three ways: 

  • “Springing,” which comes into force at the moment of incapacity.  
  • Durable, which comes into force as soon at is authorized and lasts indefinitely.  
  • Nondurable, which grants authority for a set period or for a specific transaction.  

3. POA can be revoked or changed.

Living Will

Living wills are also known as advanced medical directives, healthcare power of attorney, or designation of healthcare surrogate. A living will 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.  

Living wills 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. 

Benefits of living trusts

  • Putting accounts/assets in a trust helps ensure that they benefit the account holder for the duration of their lifetime.  
  • The terms of the trust can be changed at any point, including termination of the trust.  
  • The trust must be administered by a trustee, who has a fiduciary responsibility to act in the interest of the trust’s beneficiary.  
  • Trusts are accepted by most financial institutions.  
  • Trust can bypass probate or can be terminated upon the beneficiary’s death.  
  • Trusts can have a successor trustee, who takes over the trust after the beneficiary’s death, or a co-trustee that can manage the trust immediately.  

Potential downsides of living trusts

  • A co-trustee could potentially act irresponsibly. However, the creator can revoke the co-trustee and name a new co-trustee.  
  • The trust must be funded in advance of the creator’s incapacity.  
  • Trusts are more expensive to establish and administer.  
  • Assets in the trust are not protected from creditors.  

How to make an estate plan that protects your assets and wishes 

Understanding how these different elements of estate planning work and making the best choices for your individual situation can be confusing and frustrating. Making an estate plan that effectively protects your assets and wishes involves a variety of legal documents and will be challenging and time-consuming to do on your own.  

This is why it is best to work with an experienced financial professional that understands the various elements of estate planning and the legal requirements of each one. 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 to get started. 

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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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