Estate planning can seem like a daunting task, but what is often overlooked is the peace of mind that comes with having your wishes formally documented and knowing your decisions and belongings are in the hands of those you trust. In this piece, we discuss the ins and outs of estate planning and what every investor should know today in order to prepare for tomorrow.
Q: What exactly is an estate plan comprised of?
A: An estate plan package is more than just a standard will. It often includes a financial power of attorney, a healthcare power of attorney, a living will, a traditional will, and possibly a trust, depending on your financial and personal circumstances. Let’s break down each piece.
A financial power of attorney designates a person to make financial decisions on your behalf if you’ve lost decision-making capacity. A healthcare power of attorney designates a person to make decisions about your medical care on your behalf. A living will, also known as an advance directive, is where you provide instructions regarding medical treatment in cases where you are no longer able to provide informed consent. A traditional will denotes how you would like to allocate your assets upon your death. Lastly, a trust allows you to appoint a trustee to manage assets placed in the trust and distribute them to your selected beneficiaries. Trusts can operate during your lifetime, or come into existence at your passing. There are many different types of trusts that accomplish varied goals, including tax savings, providing liquidity for estate taxes, and allowing for the controlled distribution of assets to beneficiaries over time.
Q: Who should create an estate plan and when?
A: Estate planning is for everyone. Younger adults often think it does not apply to them because they are not near retirement and might not yet have accumulated much wealth. However, you do not need to have many assets, or even be married, to create an estate plan. There is a good reason to have an estate plan at every stage of life. This ensures that you have control over who will make critical, life-changing decisions for you and who your assets and belongings will go to should you become incapacitated in any way. If you do not have an estate plan in place, you should begin preparing one as soon as possible.
Q: What information do you need to create an estate plan?
A: Estate planning requires the creation of legal documentation that outlines and details your wishes. This process can be intimidating since you have to navigate the legal jargon and countless questions. That is why it is vital to think through what is most important to you, financially and personally, and decide who you want to include in your plans before stepping foot into an attorney’s office to create these legally binding documents.
At Wescott, our team of financial advisors counsel our clients through an estate planning worksheet to help them think through their wants and needs and have a clear vision when they do meet with a lawyer. Part of that preparation includes having a sense of what your assets are and where they are, as well as knowing your beneficiary designations (i.e., those listed on your life insurance plan(s) or retirement account(s)).
Q: What are some common misconceptions about estate planning?
A: One common misunderstanding is thinking that your will controls everything. It actually falls second to any beneficiary designations that are affiliated with your assets. For example, if you name someone as a beneficiary on your retirement account, that person will inherit the account regardless of what your will says.
Another misconception is that you do not need a will because your spouse is your power of attorney. There can be confusion because these documents are often both signed at the same time, but there is a significant difference between the two. A power of attorney operates while you are alive but have lost decision-making capacity and is only valid during your lifetime. When you pass away, your power of attorney is no longer valid. Instead, your will then takes over, and your named executor manages your affairs. If no one is named, a family member or friend must petition the probate court to become an administrator (who functions like an executor), which can often be a long and complex process.
Q: How often should estate plans be reviewed or updated?
A: There are a few inflection points throughout your life that are good times to review your estate plan and make updates as necessary. For example, getting married, having children, nearing retirement or experiencing the loss of a spouse would be a good time to take another look. These life events might spur you to name a new power of attorney or executor, or to name guardians for children, and so on. Aside from life events, you should review your estate plan at least once every three years. It is important to make sure all the provisions you have set are still appropriate. If all looks good, then there is no need to redo your plan.
Q: What are some of the benefits to having an estate plan?
The number one benefit is knowing that the people you trust will be the ones making decisions on your behalf, and that your assets will go to the people and/or entities you wish. Without a will, each state has its own laws for allocation of assets and the line of succession for who receives your estate. These laws of intestacy could mean your estate ends up with a remote relative, rather than a friend or charity of your own choosing.
It is also beneficial to have an estate plan in place to minimize estate and other taxes to the extent possible by utilizing certain trusts, having a lifetime gifting strategy, and/or naming charities as the beneficiaries of retirement accounts. Tax law is always changing so estate documents must be drafted with as much flexibility as possible. A financial advisor can help you understand all of the implications to ensure your plan is set up for the best possible outcome.
Take the Time Today to Plan for Tomorrow
Estate planning does not have to be as burdensome as it might initially seem. With a trusted financial advisor guiding you through the process, you will feel secure and confident that your estate will be managed properly, and your loved ones will be taken care of exactly as you wish. Ready to learn more? Speak to a member of our very own Wescott Estate Planning Team today to prepare for what is to come in the future.
