Many people delay estate planning since it brings up negative thoughts. We understand if the idea of mortality makes you uncomfortable, but neglecting to manage your assets will impair your family’s finances after you pass away. In the worst-case scenario, everything you worked for could end up in the wrong hands.
Navigating through the process might feel intimidating, which is why we made a comprehensive guide elaborating the process of estate planning, post-death asset protection, and last will and testament drafting. A firm grasp of the basics should help you begin planning your estate.
What is Estate Planning?
Estate planning involves updating paperwork regarding the distribution and disposal of your assets after death. Strive to perform this task while you are in good health. Managing a lifetime’s worth of assets requires critical thinking and decision-making, which those with compromised health cannot perform.
Some of the documents you will encounter while planning your estate include the following:
The contents of a will vary on a case-by-case basis, but they should generally answer the following questions:
- Who do you appoint as your executor or trustee?
- How should your trustee divide your assets?
- Who will take custody of your minor children?
- Do you have any funeral wishes?
These documents are paramount to estate planning. In fact, if you have never thought about the division of your assets after you pass away, you can begin by drafting your will.
Durable Power of Attorney
The durable powers of attorney (POA) allows an appointed point person to act in your place. It will take effect if you cannot make grounded decisions yourself (e.g., unforeseen accidents, critical illnesses, comatose).
- Generally, the POA contains legally binding agreements that:
- Ensure all documents involved with prior estate planning sessions stay in effect
- Verify your point person has the authority to make significant financial and legal decisions on your behalf
Note: Your point person could be a family friend, relative, immediate family member, financial advisor, or attorney.
Health Care Proxy, Agent, or Power of Attorney:
The health care proxy, agent, or POA grants your appointed point person the authority to make significant medical decisions on your behalf. In these situations, they will gain access to all your medical records.
All health care institutions require these agreements. Not even your direct family members can view your full medical records unless they have a signed and notarized health care proxy, agent, or POA.
A living will contain your end-of-life medical treatment preferences. They serve as a reference in dire situations where your current condition prevents you from making clear directives or providing consent. Also, your appointed health care proxy cannot go against the conditions explicitly stated on this paperwork.
To avoid confusion and misinterpretation, we strongly suggest addressing all possible medical decisions, including:
- Antibiotic medication
- Cardiopulmonary resuscitation (CPR)
- Mechanical ventilation
- Organ and body donation
- Palliative care
- Tube feeding
Revocable Living Trust
Living trusts contain directives on the proper division of your assets after you pass away. The “revocable” portion means that you can change the terms and conditions on these documents any time during your life. Many advisors encourage clients to use revocable instead of irrevocable living trusts.
Personal Property Memorandum
The personal property memorandum contains directions on distributing personal belongings like furniture, silverware, jewelry, gadgets, and artwork. Since you acquire and dispatch tangible possessions far more often than large assets like real estate, update your PPM frequently.
Note that different states have varying regulations on what assets you can include in your personal property memorandum. However, in most cases, you cannot use PPM to transfer:
- Cars, motorcycles, airplanes, or any vehicle that requires a license and registration
- Cold hard cash or bank accounts
- Stock investments
- Tangible business paraphernalia or equipment
7 Reasons Why You Should Never Forego Estate Planning
Contrary to what some people might think, estate planning is not limited to the rich. Households need to manage their assets accordingly, regardless of social class. Those who belong to the upper, upper-middle, middle, working, or lower class yield the same benefits from scheduled estate planning, which include:
1. Preventing Inheritance Arguments
It’s not uncommon for beneficiaries to fight over inheritance money. One party might feel they deserve to receive more or that the others will simply blow through their inheritance money. These disputes can even worsen into long-term grudges.
Fortunately, explicit terms prevent disagreements over your inheritance. Give clear directions on who will inherit specific portions of your assets, then explain in private, individual letters why you felt this amount was fair.
As a bonus, you can use your will to direct how your beneficiaries should spend their money. We understand that not everyone shares the same discipline as you do. To ensure they do not waste their inheritance, make special arrangements with your trustee like:
- Setting a limit on how much your beneficiary can withdraw annually
- Passing down appreciating assets like stocks or real estate instead of cash
- Explicitly stating what the money can or cannot be used for
2. Lesser Taxes
The IRS will require your beneficiaries to shell out a portion of their inheritance money to settle certain tax liens. Taxable inheritance assets include stocks, bonds, real estate, and cash. However, you can avoid certain taxes by transferring assets using the right investment vehicles. After all, you would not want the IRS to seize all your hard-earned money.
First, limit your joint accounts and stocks. If you pass away, your child will continue to pay taxes on these types of assets until they make a withdrawal or sell shares. The total tax amount could reach several thousands of dollars for large, long-held accounts.
Second, set up a trust. Trusts allow individuals to pass assets to their beneficiaries without undergoing state probate, thus avoiding certain estate taxes. Just make sure to manage your trust accounts well.
3. Preferable End-of-Life Treatments
Having a reliable health proxy execute a clear, detailed living will ensure that you undergo your preferred end-of-life treatments and programs. These agreements take effect in cases where you cannot provide directions or consent.
For example, if you state that you do not wish to receive aggressive antibiotic treatments, your health care provider will resort to conservative medication. Similarly, relatives cannot remove your life support if you explicitly prohibit them from doing so.
4. Asset Value Retention
Your money will not hold the same value tomorrow as it did today. A surge in fast-moving consumer goods and necessities heavily affects the value of your country’s currency. Simply put, the power of cash depends on how much it can buy.
Unfortunately, experts predict inflation rates to spike upward of 2.5% in the next five years. Using these rates as a reference, you need a passive investment vehicle that pays no less than 2.6% to 3% annually to retain your money’s value.
5. Generational Wealth and Financial Protection
Many individuals pass away without exhausting their financial resources. Since you cannot take your fortune with you to the next life, put it to good use by supporting your living family’s future instead. The dead cannot use money, but your children and grandchildren can rely on these for many years.
If you want to work toward a bigger goal, aim for generational wealth. Give the succeeding generations a head start at creating an empire by laying the foundation for them. Grow and pass down your money.
Also, draft your will so that your beneficiaries will grow their inheritance money and work toward the same goals as you.
6. Proper Care for Your Children
If a child loses both parents, and there is no will in place, the court will appoint a legal guardian. The prime candidates include immediate family members (e.g., siblings, parents, cousins). Although, for orphans over 14, the court will consider who the child wants to live with going forward.
The justice system has guidelines to ensure that the court appoints a suitable, responsible guardian. However, these provide limited assistance. If you want your child to receive proper care and nurturing even after your untimely death, explicitly indicate who you want to have custody over your child.
To finalize the decision, your appointed guardian has to sign the necessary supporting documents—which an estate lawyer can provide.
7. Inheritance Loans
Beneficiaries who need fast cash can take out loans using their inheritance. Many commercial banks and lending institutions allow lenders to use their guaranteed inheritance money as collateral for several loan products.
However, only allow your beneficiaries to do so during emergencies. Having loans against the money you want your loved ones to inherit might compromise your estate plan’s overall integrity.
If a beneficiary wastes their supposed inheritance money on bad loans, rearrange the terms during your lifetime. Remember: you cannot control their poor spending habits after you’re gone.
If you want to protect your family, we advise planning your estate as soon as possible—you do not need to wait for retirement. Most financial experts recommend starting once you acquire inheritable, taxable, and transferable assets. After the first session, update your documents every five years.
Those who find the process confusing can seek help from an estate law professional. Consult with them on the best ways to divide your possessions, avoid unnecessary taxes, and protect your assets from inflation rates. Although, beware of agents who sell financial products under the guise of financial planning.
How often do you think one should review their estate plan? Share your thoughts with us in the comments section below!