Estate planning involves the practice of organizing the distribution of assets upon death or incapacity, typically through wills, trusts and beneficiary designation forms.
Not all assets pass through probate, including joint owned property and accounts with designated beneficiaries (toddler accounts, life insurance policies and IRAs).
An ideal strategy is to update your plan every three to five years or whenever a major life event arises.
1. Basics of Wills and Trusts
Although estate planning may seem only relevant for the wealthy, everyone should plan for their future and prepare an estate plan, regardless of asset value or number. Failing to plan for one’s estate can cause confusion, costlier legal fees and increased stress levels during difficult times for families.
A simple will can provide guidance on how you want your assets distributed, designate a guardian for children, and provide instructions regarding healthcare should you become incapacitated. But an estate plan typically comprises more than just this document.
Trusts are separate legal entities into which you can transfer some or all of your assets for distribution and tax mitigation, keeping family affairs private while giving more control over asset distribution. Trusts do, however, require a comprehensive analysis of all your assets before creating one.
2. Asset Allocation Spreadsheet
When taking the time and effort to create a spreadsheet that tracks all your accounts (checking and savings accounts, investments and life insurance), why not use it to get an understanding of your asset allocation?
An effective asset allocation will reduce overall investment risk by diversifying your portfolio across various stocks and bonds, or asset classes. Research has revealed that it’s often not about the specific stocks or bonds you purchase, but rather their overall mix which makes the biggest impact over time.
On the Asset Allocation Spreadsheet, the Diff column indicates how far your actual portfolio’s allocation has deviated from what you desire; if that distance exceeds a predefined percentage threshold, rows in red indicate any discrepancies.
3. Beneficiary Designations
Financial accounts such as life insurance policies, investment and retirement accounts and annuities often allow their users to name beneficiaries who will benefit upon death. In many instances, such designations supersede any instructions left in a will.
Your primary and contingent beneficiaries can be named. In the event that the primary beneficiary passes away, their shares of the account may pass onto them – in which case, contingent beneficiaries would take over to ensure you still benefit from it.
As your family circumstances shift, it is vital that your beneficiary designations stay up-to-date. Be sure to review them with legal and financial advisers as frequently as necessary in order to prevent confusion after death, ensuring your assets go directly to those you intend.
4. Power of Attorney
Wills serve to outline how an individual wants his or her property and assets distributed upon death, with any details pertaining to minor children (if applicable) care for distribution, funeral arrangements and memorial tributes being included if desired.
Power of Attorney grants one individual or organization the legal authority to act on another’s behalf. It is recommended that individuals create separate durable powers of attorney for health care and finances, choosing agents with complementary skillsets and personalities in both areas. While most state governments provide standard forms, the best POAs should be tailored specifically for each person’s situation and goals; agents, known as Attorney-in-Facts can have either broad or limited authority.
5. Living Will
People need more than a will when it comes to estate planning; an effective strategy must include multiple tools and vehicles that work together in order to protect your family after you die.
A simple will is a document that details how you wish your property to be divided after death and names an executor to carry out your instructions. A will may also name guardians for minor children or animals entrusted to it.
Durable Power of Attorney is a legal document that empowers someone you trust with the authority to make decisions and carry out certain actions on your behalf should you become incapacitated. Additionally, this legal document can include a living will – an order placed during any life-threatening conditions which only comes into effect during treatment.