Jimi Hendrix, Bob Marley, Pablo Picasso, and Abraham Lincoln. What do these famous people have in common? They all died intestate, i.e., died without having a will.
In a report by Trust & Will, they found that one-third of millennials do not know if their parents have an estate plan. Among other findings:
- Only 58% of millennials have discussed estate planning with older relatives.
- 62% of millennials have no will or trust of their own.
Estate planning is a crucial step in the financial planning process. It ensures that your wishes are honored and your loved ones are taken care of after you’re gone. We find the first step in getting the estate planning ball rolling is to learn the basics. With no time to spare, let’s dive right in.
Wills Are the Roadmap for Probate
A will is a roadmap for assets that flow through probate. It is a document where you designate your executor/executrix (the person that administers your estate) and specify who inherits your assets. In addition, a will allows appointed guardians for your minor children and pets, making it vital for parents and pawrents.
Without a will, the courts will appoint your executor, which can elongate the probate process, and your estate may be divided according to state laws, which may not align with your intentions.
Want to Avoid Probate? Think Trusts!
Trusts serve multiple purposes in estate planning. They can help manage your assets during your lifetime and facilitate the transfer of those assets after your death without going through probate. This can save time and reduce legal fees.
There are several different types of trusts, such as living trusts and testamentary trusts. Living trusts take effect during your lifetime, while testamentary trusts are established through your will after your death. Testamentary trusts do not avoid probate, though, since they are created through your will. Trusts can also provide privacy, as they typically are not public documents, and creditor protection once they become irrevocable.
What if You Become Incapacitated? Advance Medical Directives Can Help!
Medical directives explicitly detail your preferences for medical treatment in the event you become incapacitated. Advance directives typically include two parts, a living will and medical power of attorney (POA).
A living will specifies the types of medical procedures, drugs, and treatments you do or do not want. The medical POA allows you to designate someone to make healthcare decisions on your behalf. With these documents combined, you will ensure that your healthcare choices are respected even when you cannot express them directly.
Who Will Pay Your Bills? Your Financial Power of Attorney, Of Course
A financial power of attorney (POA) grants authority to a designated individual to manage your financial affairs. This can include tasks like paying bills, managing investments, or working hand in hand with your financial professionals (like financial advisors and tax accountants). You can choose to make this authority effective immediately or only in the event of incapacity. The person you elect as your financial POA should be trustworthy and have strong money management skills.
The Next Steps:
First, Create Your Estate Plan
We’ll be honest; creating your estate plan is not the most fun activity. It requires you to think about your mortality and how you want your assets divvied up. Oftentimes, working with an attorney is a great way to determine which documents are essential and the most appropriate way to pass along your legacy. Online platforms like LegalZoom and Trust & Will also provide cost-effective ways to get your estate documents drawn up.
Then, Review Your Beneficiaries and Retitle Accounts
Once you’ve signed the dotted line, the job isn’t quite finished. You’ll want to review the beneficiaries on your accounts (such as your 401k beneficiaries) and the titling of assets. For example, if you create a trust, you then need to fund the trust by retitling assets, like your house or brokerage account, into it.
Lastly, Have Those Conversations
On top of talking with the folks you designate as your executor, trustees, powers of attorney, and their successors, it can be helpful to discuss your estate plan with your beneficiaries. This creates transparency and gives you the opportunity to explain your decision making with your heirs.
When Should You Update Your Estate Docs?
Just like your financial plan, your estate plan should not be static. A good rule of thumb is to review your documents every 3-5 years and have an attorney review them every 7-10 years, because laws can change overtime.
In addition, when your life changes, your estate plan should too. For example, if you marry, move states, or have kids, it may be time to get your documents freshened up. Further, you’ll want to review the people you named as executors, trustees, powers of attorney, etc. to ensure they are still around and willing to do the job.
The Last 30 Seconds
Taking the time to create your estate planning package is essential to a well-rounded financial plan. Estate documents can also be a gift to your beneficiaries by creating an organized flow of the transfer of assets, thus reducing potential stress for your loved ones during an already challenging time.
As financial advisors, it is our job to help clients understand the importance of having an estate plan in place and ensure their accounts accurately reflect them. If you’re not sure how to get started with an estate plan, we can help get the ball rolling. Send us an email at questions@FSAinvest.com or click here to schedule a call with one of FSA’s CERTIFIED FINANCIAL PLANNER™ professionals. See you in the next blog post!
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