You may need an estate-planning lawyer for parts of your estate plan, but your first conversation should be with your financial advisor.
Your financial advisor knows you and your money. He or she can identify risks, help you prioritize action items, refer you to a qualified lawyer, and prep you for the costs involved in the estate-planning process.
Here are 11 strategies that can help prepare you for those early conversations with your financial advisor:
Estate planning is the process of organizing your affairs before your death. This includes making decisions about who will receive your property, and how your debts and expenses will be paid. Estate planning can also involve arranging for the care of your minor children or disabled family members.
Your estate is essentially everything you own and owe. If you die without a will or estate plan, your state government will settle your estate and divvy up remaining assets according to intestacy laws. These laws define an order of priority for your surviving relatives to receive your property.
Generally, your surviving spouse is at the top of that list, followed by surviving children. If you don’t have a surviving spouse or children, your property may go to your parents or other relatives.
Probate is the court process governing estate settlement. It can take many months to finalize. That’s not ideal for your loved ones, who may not receive their inheritance for some time.
This is a primary motivation for estate planning — with a structured estate plan, you can minimize assets subject to probate or avoid probate entirely. You can also distribute your assets however you’d like, even if your preferences don’t align with your state’s intestacy laws.
Generally, smaller estates can qualify for an expedited or informal probate. You don’t have to spend away your wealth to qualify, either. You can simply minimize your assets that are subject to probate. The following five strategies support that goal.
Bank and asset accounts with named beneficiaries do not go to probate. They simply transfer to your named beneficiary after you’re gone.
You can add beneficiaries to your checking and savings accounts, CDs, investment accounts, annuities, and life insurance policies. Your financial advisor can help you identify which accounts on your personal balance sheet should have named beneficiaries.
A trust is a legal entity that can own and manage assets, including real estate, financial accounts, cars, and business interests, among other things. The property you transfer into the trust while you are living will not go through probate. Instead, it will be managed or distributed according to the rules of the trust.
Those rules can be complex or straightforward. For example, say you want to bequeath property to a younger relative who’s financially immature. If you’re worried about that individual managing a lump sum inheritance, you could set up smaller, periodic payments instead. The trust could provide enough income to help with living expenses, but not enough to risk a wild spending spree.
On the other hand, your trust might distribute the entire estate to a few relatives all at once. Once the property is transferred out of the trust, the trust dissolves.
There are several types of trusts. Your trust attorney and your advisor can guide you on which type best suits your situation.
Jointly owned property can also sidestep probate when right of survivorship is in place. As an example, you might add an adult child as joint owner of your home with right of survivorship. The home would transfer to your child upon your death, outside of probate.
As an estate planning strategy, joint ownership with right of survivorship has limitations. Once you’re gone, the surviving owner has no legal obligation to fulfill any property distribution instructions you left behind.
If you’d like the home sold so proceeds can be shared with other family members, for example, a trust is a better strategy.
Joint ownership can also be problematic while you are living. For one, you risk claims on the property by creditors of your joint owner. As well, creating the joint title can trigger a taxable gift.
Gifting involves giving away your wealth while you are living. To avoid incurring gift taxes, your property distributions must be less than the IRS annual gift tax exclusion. That exclusion is $16,000 in 2022. It will rise to $17,000 in 2023.
The gift exclusion is per-person, per-year. If you have two kids, for example, you can gift them each $16,000 during the calendar year 2022. The gift can be in cash or property at fair market value.
Some states allow you to add a beneficiary name to real estate and other property by way of a transfer on death (TOD) deed. Under this structure, you retain full control over your property while you’re living. Upon your death, the beneficiary becomes the legal owner.
TOD deeds partially remedy the financial risk of joint ownership with right of survivorship — your beneficiary’s creditors won’t have any claim to the property while you are living. But as with joint ownership, you can’t enforce any distribution instructions once the beneficiary assumes ownership.
It’s likely you’ll have some probate assets upon your death. A will documents how you’d like those assets distributed.
A last will and testament is a legal document that explains how you’d like your property distributed and to whom. Your will also names an executor for your estate and a guardian for your minor children. A valid will overrides state intestacy laws.
Unfortunately, having a will does not keep your estate out of probate. It’s through probate that the courts validate your will and implement its instructions.
Know that the distribution preferences outlined in your only apply to property that goes to probate. If you have bank accounts with named beneficiaries, for example, those beneficiaries will receive the assets in those accounts — even if your will says something different. The same is true for property in trust at the time of your death; that property will be managed according to trust rules, no matter what your will says.
Permanent life insurance awards a tax-free, lump sum settlement to the beneficiary (or beneficiaries) named on your policy. If you have more than one beneficiary, you would specify how the cash payment gets allocated to each.
A death benefit from life insurance is one of the faster and more precise inheritance payouts. As such, life insurance might be a strategy you employ to help your loved ones pay inheritance taxes on fixed assets like real estate.
A financial power of attorney (POA) authorizes an agent to make financial decisions on your behalf.
Establishing a financial POA while you are healthy is a strategy to avoid an expensive conservatorship petition later. If you become incapacitated, your agent can pay your bills and make financial arrangements for your care. Without the POA, your loved ones would have to petition the courts for conservatorship.
Financial POAs are often effective the day they are signed. If you’re not comfortable with granting those powers immediately, ask your advisor team about a springing POA. Springing POAs grant rights upon some condition. The condition could be a marked decline in your cognitive ability.
Springing POAs can be tricky, however. For one, not all states uphold them. And two, the language must clearly outline when that POA becomes effective. There is a chance you could experience some form of mental or physical decline that’s not strictly within your POA’s definition.
A living will is formal documentation of your preferences for end-of-life medical care. Typically, the document outlines what treatments and medications you refuse. It’s a type of advance directive, only used when you are unable to tell your medical team what you want.
While the living will should govern how you are treated, there are financial implications for your estate as well. For example, a drawn-out hospital stay involving life support can easily consume your wealth and even shift liability to your family. If you are opposed to life support and/or certain types of resuscitation, a living will can help you avoid that outcome.
A medical or healthcare POA grants someone legal authority to make medical decisions for you. Even if you have a living will, you likely want a healthcare agent also. This person can resolve any situations not covered by your living will.
Long-term care insurance helps pay for treatment and palliative care costs associated with chronic or terminal conditions. According to insurance company Genworth, median long-term care can cost up to $9,034 monthly for a private room in a nursing home. Financial support in this area can save your estate tens of thousands of dollars over time.
When you know these estate planning basics, you can have productive, efficient conversations with your team — financial advisor, lawyer, and tax advisor. Under their guidance, you can structure an estate plan that efficiently shares your wealth with the people you care about most.