You are never too young to think about estate planning. I know that even the term estate planning can feel touchy. Let’s be real: Estate Planning is a polite way of saying death and incapacity planning. No one WANTS to talk about it (well maybe estate planning attorneys do). While talking about death is a tough topic, it will occur. It’s worth planning what will happen to your assets after you pass away (or become unable to manage them – incapacity). Now, we are not estate planning attorneys, and we encourage you to seek out advice from one. But there are estate planning elements to everyone’s financial plan. There are easy steps many people can take to improve this overall plan.
Step #1: Beneficiary and Transfer on Death (TOD) Designations
Absolutely everyone should do this. Most people have most of their assets in retirement or investment accounts. Ensuring you have a beneficiary designated for your retirement accounts (IRAs, 401(k)s, etc.) and a TOD designated for any other accounts (bank accounts, brokerage accounts, and even physical objects such as cars) is the single easiest thing you can do. But why should you do this? Apart from the control of naming who gets what assets, beneficiary and TOD designations avoid probate. But what’s probate?
When someone passes away, their assets pass through probate, which is the court’s process for ensuring assets go where they are legally supposed to go. Usually this is in accordance with a deceased person’s Will, but the asset distribution is subject to state laws if no Will is present. The fees associated with probate run between 3 – 7% of a person’s total estate. Furthermore, it’s a public process. However, when beneficiary and TOD designations are established, the assets in those accounts stay out of probate (and out of the will). They go directly to the designated person/people and bypass the Will.
Step #2: Establishing a Medical and Financial Power of Attorney (POA)
In the event you become incapacitated and are unable to manage your medical/financial affairs, you want someone to be able to legally make these decisions for you. Someone who has a Power of Attorney can do just that. They can make decisions on your behalf. Someone with a medical POA can make medical decisions on your behalf, and someone with a financial POA can make financial decisions on your behalf. You’ll want to give some thought to who that might be. Obviously, trust is important, but you also need to be confident they can manage your medical and financial affairs. These can be separate people or the same person. Someone who holds your Medical POA doesn’t have to hold your Financial POA.
Now there are different types of POA authority, which are detailed below.
Springing: This means the POA takes effect when a person becomes incapacitated. Let’s say you don’t want anyone else to have authority over your finances when you are perfectly healthy (which is completely reasonable), but then you get in a car accident and you become incapacitated. You’d want the POAs to become active so someone can make decisions for you. This is one example of why you’d want to get a Springing Medical and/or Financial POA.
Durable: This means the POA is not changed when a person become incapacitated. With traditional, nondurable POAs, power ceases when the principal is no longer legally competent. Many times, people create durable POAs when they are experiencing early onset mental health issues such as Alzheimers or Dementia. They have the cognitive ability to make informed decisions now, but they know they won’t have this ability in the future. Furthermore, when they eventually become mentally incapacitated, they will be unable to create a POA because they cannot legally sign. So they’d want the POAs to activate now and last through incapacity. This is when you might want to have a Durable medical/financial POA.
Usually these aren’t expensive, and many lawyers will draft these “for free” if you create a Will (Step #3).
Step #3: Get a Will
For most people, Step #1 will take care of distributing investable and banking assets efficiently. But for everything else (your possessions, your special necklace, your prized gun collection, etc.), you’ll want to designate who gets these items. That is a Will’s purpose. Wills are not perfect, but they are relatively inexpensive compared to Step #4 (Revocable Trusts). A Will is public. People can challenge the Will, and state law can SOMETIMES supersede a Will. For example, suppose a husband changes his Will after a fight with his wife and changes his Will to leave everything to his child. The next day, he dies in a car accident. There are laws to protect spouses from this very scenario in many states. A judge would say, “Hold up. Your wife gets at least a percentage of his assets, which varies from state to state.” Obviously talk to an estate planning attorney for details in your specific state. If you think there’s complexity to your estate that goes beyond just delegating who gets what immediately at your death, you’ll want to look into a revocable trust (Step #4).
One last note about Wills: If you are a parent of a minor, you NEED TO GET A WILL… TOMORROW. In Wills, you establish who has guardianship of your children if both parents pass away. Make sure you decide, not the court system. You may also want to establish a testamentary trust, which is sometimes established as part of a Will. A testamentary trust is where certain assets that you want to leave to your children can “wait” until the children reach the age of majority (usually 18 years old). The trustee of the trust (the person in charge after your death), legally must follow the testamentary trust plan documents so you can rest assured that your children will receive the assets at the age of the majority.
Step #4: Get a Revocable Trust
Revocable Trusts are more complicated and more expensive than wills, but they give you more flexibility. While everyone should have a Will, not everyone needs a revocable trust. The basic idea is you fund the trust when you are alive. You use it for living expenses now. When you pass away, the trustee of the trust has to follow trust plan documents you established during your life. And these documents can detail how certain assets are given to certain people at very specific times. For example, you could set up a revocable trust to say, “When my children reach age 30, they get 50% of the contents of the trust. They receive the other 50% at age 40.” You can also put in clauses for disability and ongoing support for a living spouse. You can see a Revocable Trust is more flexible than a Will. Additionally, all assets in the trust avoid probate. Here are two more examples of where you might want to use a revocable trust:
1) You have many different asset types: business ownership interests, real estate, etc. By putting them all in the revocable trust, they avoid probate and you gain more control over where they go.
2) Protecting your spouse. As people age, their mental acuity decreases. We see so many instances of scammers taking advantage of the elderly. If you plan to simply leave everything to your spouse, and your spouse ages to where they aren’t able to filter through scammers in quite the same way they used to, you might want to put the money in a revocable trust. Then a trustee can pay out living expenses to your spouse after your death. The trustee can filter through the “scams” and ensure an elderly widow or widower doesn’t send all of their money to unverified sources.
Step #5: More Complicated Estate Plans
If your total assets are above the estate tax exemption ($12,060,000 / person), then you’ll want to look into a different and more complicated estate plan to save on estate taxes. However, for most of us, we don’t need to go beyond Step #4. The estate tax exemption will most likely decrease in 2025, but that still excludes a large number of people. If your net worth exceeds the estate tax exemption, talk to an estate planning attorney soon.
