Most Americans seem to view estate planning as an issue that is only relevant to the ultra-high net worth crowd. Perhaps you might think if your “estate” doesn’t include things like yachts, private islands, or horses competing for the triple crown that you have no need for an estate plan.
According to this Caring.com survey, less than half of Americans and only 36% of those with kids under the age of 18, have a basic estate plan in place. Money is always a sensitive topic and when you add incapacitation and death to the mix, it’s no wonder that many people are not excited to focus on drafting their estate plan. The purpose of today’s post is to explain some estate plan basics and why it is so important for families, especially those with young children, to have their estate documents drafted and current.
Isn’t estate planning just a tax dodging scheme of the ultra-wealthy?
As of the 2018 tax law, the federal exemption level for estate taxes, meaning the amount of net worth that you could accumulate during your lifetime without having any estate tax liability due upon death…was $11.4MM for individuals or $22.8MM for couples. Based on these numbers and assuming that they remain at these levels, I would say it’s true that only the very wealthy have to be concerned about paying estate taxes upon their death.
So, if we’re not talking about taxes for most families, what should you be concerned about and why should you have an estate plan in place? Let’s start by defining estate plan and some of its most important benefits:
What is an estate plan?
Fidelity defines this very concisely as follows: An estate plan is a set of decisions and legal documents that protect what matters most: your family, yourself, and your finances. I think we can all agree that these are important to protect.
What documents are included in an estate plan?
The primary documents are either a will or a living trust, a financial power of attorney, and an advanced healthcare directive. The combination of these documents put in writing your wishes related to who gets your assets, your funeral/burial wishes, who will be guardians for your minor children, and who can make financial and medical decisions on your behalf if you are unable to do so, including your wishes on life sustaining treatments like artificial nutrition, hydration and ventilation.
The following are some of the most relevant issues for families with young children:
- Guardianship: In the event that you and your spouse are not around to care for your children, it is important to have your wishes stated in writing to ensure that the people you are most comfortable with are named as guardians until the kids reach the age of majority. Having a valid will drafted, signed, and witnessed addresses this concern.
- Orderly distribution of assets: It’s natural that most parents would want their remaining assets to provide for the needs of their young children, but that doesn’t mean that large sums of money or real estate can go directly to minors. A revocable living trust or a will that includes a testamentary trust would include instructions on how the assets are to be distributed and would also name a trustee or executor who would be responsible for carrying out your instructions. Proper estate planning also involving titling your assets in a manner that reduces the time, cost, and public nature involved in probate court and allows your assets to go directly to your stated beneficiaries.
- Access to and control over financial assets: Who would step in and pay bills or make financial transactions in the same manner as you would if you became incapacitated? The Durable Financial Power of Attorney would address this issue. You might ask if this is really needed. Wouldn’t your spouse or a trusted family member step in and pay bills or move money as needed? If your accounts are setup as joint accounts, you would be correct, but if you have individual accounts (i.e. brokerage, checking), there could be significant delays before your spouse could access those accounts. Would you really want your spouse, already under stress due to your condition, to be navigating the tedious process and paperwork with your bank in order to make your mortgage payment or pay your daycare provider?
- Healthcare decisions: If you became incapacitated, who would make medical decisions on your behalf and how would they know your wishes? An Advanced Healthcare Directive would authorize a person selected by you to access your medical records, speak to your health care team, and make medical decisions on your behalf. This can greatly reduce the anxiety of your family by having your wishes clearly stated.
Below are a few articles to help you decide if an estate plan makes sense for your family, whether a will or a living trust is the better path, and some helpful tips.
Do you need an estate plan? [The Balance provides 5 reasons that suggest the answer is likely "yes"]
Do you need a trust? [Source: Fidelity]
Like all financial decisions, your best course of action is determined by weighing the costs against the expected benefits. If I were working with you as your financial advisor, there would many cases where I would recommend spending less (buy a Toyota, not a Tesla; choose an index fund over an actively managed mutual fund, etc.). The preparation of your estate planning documents is not one of those cases. The internet will lead you to many DIY options for drafting wills, advanced medical directives, and other relevant documents. They may look very appealing relative to spending $1,000 - $2,000 (or more) to have a licensed attorney prepare the documents. Before you proceed with taking matters into your own hands, I would ask yourself the following questions:
- Am I educated on the most intricate details of the legal code as it relates to estates and assets in my state of residence?
- Do I know what to expect in probate court?
- Am I OK with the possibility that I might do something wrong and because of this my heirs either cannot receive my assets or they have to endure significant time, cost, and frustration before doing so?
- Do I want my heirs potentially fighting over the distribution of my assets because the court doesn’t recognize the validity of whatever document(s) I drafted?
As the saying goes, personal finance is 90% personal and 10% finance. For me, the benefits of engaging a licensed attorney (and potentially a CPA) far outweigh the costs. So much in life is outside of our direct control and that’s where proper estate planning plays a role. It brings peace of mind that if something unfortunate like incapacitation were to occur or even in the case of a long life well-lived, our loved ones will be taken care of when we are no longer able to do so ourselves.
If you are ready to get your estate plan drafted but you need help in either locating a competent estate attorney or assistance in compiling all of your relevant financial assets in advance of starting the process, please contact me HERE.
Nothing above should be considered legal advice. I am not a licensed attorney. My job as a financial advisor is to identify financial risks that a client is facing and to offer them options to mitigate those risks.