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Estate Planning Basics

Author: Sam Maness, JD CFP®

The estate plan is an integral part of the financial planning process. During life, it provides guidance when you can no longer make decisions because of disability or incapacity. When you pass away, it sets the road map for wealth transfers, guardianship of minor children, and the legacy you wish to leave behind. A well-drafted estate plan clearly outlines your future intentions, promotes family harmony, and protects your wealth. Without a plan, your final estate could result in family conflicts and costly legal actions. We advise consulting with an estate planning attorney to draft and/or review any legal documents. At a minimum, most estate plans should:

  • Execute a (1) Will or Living Trust; (2) a Living Will; and (3) Durable Powers of Attorney
  • Name guardians for your dependent children
  • Properly title real estate, bank accounts and other financial assets
  • Update and revise account beneficiary designations (retirement plans, life insurance, IRA, annuities, etc.)

Last Will and Testament

A “Will” is a legal document used to

  1. name heirs and beneficiaries;
  2. appoint the executor in charge of distributing or transferring assets and property; and
  3. name legal guardians for minor or dependent children.

The will covers the basics and provides a straightforward and efficient transfer of assets - but it does come with limitations. A will has to be approved in probate court. The probate process can take time, it costs money, and it opens the estate up to public record. When probate is complete, assets pass directly to your beneficiaries. This sounds great, but without asset protection the inheritance could be lost to beneficiary mismanagement, creditor actions, legal judgments, or divorce. To avoid these and other issues, some people draft and execute a Revocable Living Trust as an alternative.

Revocable Living Trust and the “Pour-Over” Will

A Revocable Living Trust (“Trust”) is a comprehensive estate planning document that offers heightened privacy and additional flexibility. Often, it serves as the primary estate planning document. The “grantor” creates the Trust, decides what property will be included, and executes a Trust agreement outlining rules and restrictions for transferring assets to beneficiaries after death. The grantor transfers legal ownership of assets and property to the Trust and generally serves as the managing “trustee” during his or her lifetime. The trustee has authority to manage Trust assets, with a legal obligation to administer the Trust consistent with the executed agreement. Because it is revocable, the grantor/trustee has complete discretion to sell or dispose of assets, change beneficiaries, amend certain provisions, and even terminate or revoke the Trust entirely. Upon death of the grantor, the Trust becomes irrevocable and the appointed successor trustee acts as a fiduciary to administer and distribute the Trust per the agreement. Importantly, the successor trustee can provide professional management and wealth preservation for beneficiaries after your death.

A Trust offers several key benefits: (1) asset protection; (2) centralized estate management; (3) probate avoidance; and (4) privacy. The most important feature of a Trust is asset protection. The Trust protects assets for beneficiaries by shielding outside creditors and protecting against divorce, bankruptcy, and other legal judgments. It protects assets from beneficiaries by establishing rules or limitations for asset distribution. This can be especially important with minor children or an heir that doesn’t manage money well. Because the grantor names a successor trustee, there is a designated Trust manager to enforce the agreement after death and efficiently transfer wealth. As an added benefit, the Trust keeps matters private and avoids the time, expense, and publicity of probate court.

At times, it makes sense for a married couple to have two separate Revocable Living Trusts. This generally occurs in complex situations – often to protect children from a prior marriage while also providing for a current spouse, or when the estate is subject to taxation under IRS rules. A qualified attorney – one who specializes in estate planning – can provide more guidance after reviewing your situation.

Be sure to fund the Trust with the appropriate assets by properly conveying or titling real property and asset accounts. Many individuals establish the Trust but fail to legally transfer ownership of property or assets. This is sort of like buying a boat but never taking it out on the lake. Any assets not held in Trust will be subject to probate and could end up being distributed against your wishes. A “pour-over will” is a testamentary will that conveys your remaining estate to the Trust at your death. This should be executed along with the Trust to operate as a safety net in case you miss anything. The pour-over will should also name guardians for any minor or dependent children, as some states do not allow guardianship designations within a Trust.

Beneficiary Designations

Asset accounts with beneficiary designations (retirement plans, life insurance, IRA, annuities, etc.) pass directly to the designated beneficiary and are not subject to the terms of your will or revocable living trust. These beneficiary designation forms are a vital and often overlooked part of your estate plan. If you have a $1MM estate with a $900,000 401(k) account, 90% of your estate is controlled by a single beneficiary designation form! Review your beneficiary designations to be sure they align with your estate plan. And be sure to consult with an attorney before leaving accounts directly to a Trust, as this can have potentially adverse tax consequences and reduce the net amount you pass on to beneficiaries.

Durable Powers of Attorney (Legal and Health Care) and Last Wishes

Often overlooked, these important documents become effective prior to death. Most states provide statutory forms to the public.

Legal/Financial Durable Powers of Attorney - A “power of attorney” is the broad or limited authority to act for another person in legal or financial matters. A “durable” power simply means that the legal authority granted to the agent continues to be effective in the event of incapacity. Issues with incapacity and long-term care are common, and these documents should not be overlooked.

Property – Agent has the power and authority to handle your personal and financial affairs. Depending on the wording of the legal document, the agent may have broad or limited power to act on your behalf with regards to real estate transactions, financial accounts or securities transactions, and personal property.

Power of Attorney for Health Care - Agent has the power and authority to make health care decisions on your behalf.

Patient Advocate Designation or Advanced Medical Directive - A written declaration concerning your preferences for or against life-sustaining medical care and treatment if you are unable to provide informed consent, and/or suffer from a terminal illness or incapacitation. This is also known as a living will, and is often included within your health care power of attorney.

Sam Maness is a financial advisor with McLaren Wealth Strategies at 315 E. Eisenhower Ave, Suite 301, Ann Arbor, Michigan 48108. You can contact the McLaren team at mclarenwealth@raymondjames.com or 1-866-944-7556.

Opinions expressed are those of the author and not necessarily those of Raymond James Financial, Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Links are provided for information purposes only.  Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed web sites or their respective sponsors. Securities offered through Raymond James Financial, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. McLaren Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc.