What in the H-E-double Hockey Sticks is an Estate Plan, and Why Would I Want One?
If the subject line of this blog resonates with you, you are not alone. So many people don’t understand what an estate plan is and why they would want one, and frankly, why should they? It’s not like we talk about these things a lot and many of us, fortunately, haven’t encountered situations where one was necessary or wasn’t already in place. But, for those that have experienced what it is like when someone passes without an estate plan, they know how vitally important they are. In today’s blog I break down the key elements of an Estate Plan and their respective purpose, which should help you understand why you need one. In fact, that’s why this fall I’m reviewing my client’s beneficiary designations and estate plans as part of my comprehensive financial review.
So Just What is an Estate Plan?
It would be best to begin with a simple definition. An estate is simply the sum of everything you own that has value. Put another way, it is your net worth that would include: land, real estate, stocks, bonds, annuities, cash, your 23 Window Classic VW van, and any other assets you own or have a controlling interest in less any liabilities (mortgages, consumer debts, etc).
An estate plan is simply a plan for how you would like to distribute your net worth after you’ve moved on to the next life (i.e. died). In my previous blog, I explained how expensive and time consuming it can be without one.
Elements of Estate Planning
Given this definition, estate planning can seem simple enough on the surface. However, there are many critical components to ensure your estate plan will be effective. I’ve outlined some of the critical components below and their specific purpose.
Will
Most people are familiar with this component of an estate plan. A will is where you provide the details on how you want your assets distributed at death, who will serve as your estate’s executor (i.e. the person who carries out your wishes stated in the will), who the beneficiaries of your estate are, and how and when these said beneficiaries will receive your assets, and who would be guardians for any minor children etc.
A will is vitally important because it is here where you will name the beneficiary(ies) of certain assets that don’t allow you to directly name one. For example, whenever I establish a retirement account for clients, we always need to list at least one beneficiary. However, certain assets don’t allow you to list a beneficiary. Your house and any other real estate you own are the best examples of these.
Wills can be as simple as a handwritten note. However, wills alone are not sufficient as they are not legally binding, and therefore can be contested in court. That’s where you get handwriting experts testifying to the validity of the will. While the will can provide direction to the court in how you want your assets distributed, your beneficiaries will still have to go to court if that’s all you have. The legal process for settling an estate is called probate. As I mentioned in my previous blog, probate is really expensive and open to the public.
Trust
If a will doesn’t avoid probate, what does? This is where a trust comes in. A trust is an arrangement that allows a third party, a trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. Since trusts usually avoid probate, your beneficiaries will gain access to these assets much more quickly than if all you had was a will.
There are a number of different types of trusts that can be setup, and each have their unique purpose. I’ll leave that to the lawyers to explain which would serve you best, but a major distinction between trusts is whether they are revocable or irrevocable.
My wife and I have revocable living trust that we established in 2016. It allows us to proceed with our lives normally, and we can change it at any time. It essentially serves as a safety net in the event that something was to happen to my wife and I as our family would be taken care of. Once we both pass away, it will become an irrevocable trust and that is when our executor will take over. Currently it’s my brother, but if we are fortunate to live a long life, we can change the executor to one of our three boys. Revocable estates are subject to estate taxes, but only if the value is greater than $23.4 million (2021 tax law). Fortunately, ours is much lower than that so we won’t have to worry about that. Although Congress is looking at lowering the estate plan exemption to a much lower number.
You could setup an Irrevocable trust which would help mitigate taxes, however all assets transferred to the trust are beyond your control, and the terms of the trust cannot be changed, nor can the trust be dissolved. These types of trusts work if your primary aim is to reduce the amount subject to estate taxes by effectively removing certain assets from your taxable estate.
Power of Attorney
A will and trust are effective instruments for your estate after you have died, but what if you’re alive and unable to make decisions (a medically induced coma for example)? Who would you trust to make decisions for you and your family? This is where a power of attorney comes in. With these, you grant authority to another person to make certain decisions on your behalf. A durable power of attorney means this arrangement will generally continue until your death.
Healthcare Power of Attorney (also known as durable power of attorney for health care)
We all hope that we will die peacefully in our sleep. However, it may not end up that way. For those that end up on life support, your loved ones and the doctors will need to know what actions you would want taken. This is where a healthcare power of attorney comes in. It will outline the specific circumstances and what you would want done. Without one, your family will need to assume your wishes, and if there is a difference of opinion amongst family members on what should be done it can strain relationships at an already critical moment. Outlining your specific wishes will save your family a lot of headache and heartache.
In Conclusion
I hope I’ve been able to show why in the H-E-double Hockey Sticks you would want an Estate Plan. Too many make the mistake thinking they will just set one up later. The Covid-19 pandemic caught many people without such plans. At the very least you could consider online options to complete basic estate plans before you decide to sit down with a paralegal or attorney.
My wife and I established a family trust in 2016 to ensure whatever happens, our loved ones are taken care of.
Thank you for taking the time to read this blog, and I hope you found the information useful. If you have any questions about estate planning, it’s best to discuss with a legal professional.
Jonny West and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.
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