Now Is a Good Time to Assess Your Estate Plan
By Jim Krapfel, CFA, CFP
November 1, 2023
No one likes to think about their mortality, but some proactivity can go a long way to ensure your wishes are fulfilled and your loved ones are less burdened if you become incapacitated or die. In this blog we delve into seven major estate planning topics to learn when it makes sense to put each into writing. Specifically, we will cover:
1) Beneficiary designations
2) Last will and testament
3) Revocable living trust
4) Durable financial power of attorney
5) Durable medical power of attorney
6) Living will
7) Final arrangements
We group these topics into three overarching objectives: (1) facilitate seamless, intentioned asset transfers; (2) manage your affairs if you become legally incapacitated; and (3) carry out funeral arrangements. We also touch on the need for estate tax avoidance strategies for the very wealthy, but we save this meaty topic for a potential future blog post.
Objective 1: Facilitate Seamless, Intentioned Asset Transfers
Topic 1: Beneficiary designations
Prioritize when: ALWAYS
Let us first introduce probate. Probate is the legal process of administering your estate after you die. A court oversees the process to make sure your debts are paid and your property is passed on to the right people. The process typically takes 6 months to 2 years, and legal fees can be significant.
Accordingly, a best practice is to minimize the amount of assets that must go through probate. Thankfully, a number of asset types can completely avoid probate by simply listing one or more beneficiaries. Accounts that can avoid probate include:
Retirement accounts such as 401(k)s and IRAs with listed beneficiaries
Brokerage accounts that become transfer on death (TOD) accounts with listed beneficiaries
Bank accounts that become payable on death (POD) accounts with listed beneficiaries
Brokerage or bank accounts that are set up as “joint” or “joint tenants with rights of survivorship (JTWROS)” pass directly to the other listed account owner if and only if it is a spouse
Life insurance payouts
Real estate with a TOD deed in the 27 states that allow them
Vehicles with a TOD registration in the 21 states that allow them
Importantly, listing beneficiaries or classifying any account as joint take precedence over what is in your will. You should regularly check account beneficiaries to ensure it captures your current intent. Let us illustrate with two hypothetical scenarios:
Scenario 1: The bulk of Matt’s assets are in his IRA. Matt lists his first-born, Krista, as the sole beneficiary of his IRA. Later, Matt has a second child, Robert. Wishing to divide his assets equally between his children, Matt creates a will that specifies his assets to be split equally. However, he never updates his IRA beneficiary information. When he passes away, the IRA’s beneficiary information will take precedence over the will, and Krista automatically takes ownership of the entire IRA. Krista is also entitled to half her father’s other assets pursuant to the will. Matt’s plan of dividing his assets equally is defeated.
Scenario 2: The bulk of Sarah’s wealth is in her home equity. She has a will that states all her assets will be equally split between her two children from her first marriage. She also retitled her home to joint tenancy after her new spouse moved in. If she dies before the second spouse, all the home equity will go to the second spouse and not her kids. Sarah should have consulted with an estate planning attorney in her state to appropriately title her property to balance her desire for her widow to remain in the house with her children having access to her home equity.
Topic 2: Last will and testament
Consider when: under 50 years old and no children
Prioritize when: over 50 years old or have children
A last will and testament delineates who receives the rest of your assets, that is assets without named beneficiaries or jointly held with a spouse. Having a will does not prevent these assets from going through probate, but it streamlines the process. When creating a will, you must name an “executor,” who is responsible for following the instructions in your will and distributing your estate to your heirs after you die. Make sure that person is aware and is willing and able to carry out your instructions.
Assets that are not “bequeathed” (distributed by a will) are distributed according to state-specific “intestate succession” laws, which may not reflect your wishes and could be in for a longer and more costly probate process.
Another important feature of a will is naming a guardian for your minor children. If you die with minor children and no will, the courts will make the decision for you. Same goes with pets. It is critical that anyone with minor children have a last will and testament so your children (and pets, if applicable) are given the most appropriate caregiver in a timely manner.
Creating a will does not require a lot of time or money. People with simple estates and wishes can utilize online question and answer tutorials from websites such as legalzoom.com and trustandwill.com (not endorsed in any way). They can usually be completed in under 30 minutes and generally cost $100-$250. You might want to hire a lawyer to draft the will if you think it might be contested by some party, or if you want to disinherit your spouse. Wills generally need to be signed by at least two competent witnesses to be legally binding.
Topic 3: Revocable living trust
Consider when: significant assets subject to probate, especially when held across multiple states, but under 60 years old
Prioritize when: significant assets subject to probate, especially when held across multiple states, AND over 60 years old or higher risk of failing health
A revocable living trust is an effective tool to avoid probate entirely. After working with an estate planning attorney to craft a living trust, you retitle all your assets into the trust such that when you die all your assets can go straight to your beneficiaries. Setting up a revocable living trust requires considerably more effort and expense, but we recommend it for clients with seven-figure or higher estates, especially if they own assets in multiple states (to avoid separate probate processes in multiple states).
Please see our blog post that gets into more specifics on revocable living trusts, their advantages and disadvantages, and what to expect when creating one. Below is a comparison of features between living trusts and last wills.
Figure 1: Comparison of Living Trusts to Last Wills
Source: Glass Lake Wealth Management analysis
Objective 2: Manage Your Affairs If You Become Legally Incapacitated
Topics 4, 5, 6: Durable financial power of attorney; Durable medical power of attorney; Living will
Consider when: over 60 years old or higher risk of failing health
Prioritize when: over 70 years old or health is worsening
A durable financial power of attorney (POA) is a legal document that grants someone the authority to manage your financial affairs on your behalf if you become incapacitated due to illness or injury. This person, the “agent” or “attorney-in-fact,” should be someone you fully trust because they will make decisions that affect your finances. In the document, you specify tasks the agent can perform, from paying bills, managing investments, to selling property.
A durable medical POA is a legal document that grants someone the authority to make medical decisions on your behalf if you become incapacitated due to illness or injury. This person, the “healthcare agent” or “medical proxy,” should likewise be someone you fully trust. In the document, you specify decisions the agent can make for you, such as medical treatments, procedures, and end-of-life-care choices like life-sustaining treatments and organ donation.
A living will is a legal document that explicitly states your healthcare preferences for your healthcare agent to reference if you become terminally ill and cannot make these decisions on your own. The document can outline the medical treatments you may or may not want if you are permanently unconscious or at the end of a terminal illness, including how long you want your life prolonged. (Medical POAs and living wills fall under the umbrella of advance healthcare directives.)
Durable financial and medical POAs and living wills must meet specific legal requirements, which vary by state. They typically involve signing in the presence of a notary and/or witnesses to ensure their validity. You can revoke or amend these documents as long as you are mentally competent.
Durable financial and medical POAs are important because they put someone you trust in charge of your finances and healthcare when you cannot be. Without durable POAs, your loved ones may have to go through the time-consuming and costly process of obtaining guardianship or conservatorship through the court system to manage your affairs, and your wishes are less likely to be carried out. Further, unlikely court proceedings, which are often public, durable POAs allow for private management of your affairs.
Objective 3: Carry Out Funeral Arrangements
Topic 7: Final arrangements
Consider when: over 60 years old or higher risk of failing health
Prioritize when: over 70 years old or health is worsening
The best way to let your loved ones know about your funeral wishes is to write down a list of specific instructions in a final arrangements document. You can specify things like (1) whether you want a funeral or memorial service, (2) where the service should be held, (3) who should be specifically notified of your death, (4) whether you want to be cremated or buried, (5) where you would like your ashes stored or dispersed or where you want to be buried, and (6) if you have money set aside to pay for your final expenses, and where it is.
It is best to have these instructions in a separate document instead of including them in your last will and testament or a revocable living trust because there is a good chance your loved ones will have made all the decisions about the disposition of your remains and memorial before your will or trust is located. Be sure to tell your family about how to access your final arrangements document while you are still alive to ensure your wishes are carried out.
Estate Tax Considerations
Many of us strive to be in a position in which we must be concerned with payment of estate taxes. That is because the amount of wealth necessary for this to be an issue is rather high in the United States. At the federal level, the lifetime estate tax exemption is $12.92 million per person, or $25.84 million for a married couple, in 2023. This is set to increase at the rate of inflation but will drop to around $6 million per person ($12 million for a married couple) in 2026 absent new legislation.
Estate taxes are a major consideration for the wealthy because a sizeable portion of their estate could be lost to taxes without careful planning. Indeed, the taxable portion of one’s estate range from 18% for the first $10,000 to 40% for amounts exceeding $1 million. There are also 17 states that impose estate and/or inheritance taxes.
Strategies to minimize or avoid payment of estate taxes is beyond the scope of this blog, however, given the considerable number of options and complexity. Perhaps we will discuss effective strategies for a given estate size, asset mix, beneficiary type, and charitable inclination in a future blog post.
Bottom Line
Some upfront estate planning work while you are healthy can go a long way to ensuring your wishes are carried out and your assets are dispersed in a timely, cost-effective, and intentioned manner. You do not need to be of advanced age for these topics to be relevant. Everyone should verify that their beneficiary information is filled out and updated, especially since that takes precedence over what is in your will. If you have minor children, it is imperative to have a last will and testament that specifies who will act as your children’s guardian if something happens to you.
Store your estate planning documents in a safe, secure location and be sure to notify your loved ones where they are. Also, do not forget to list all your digital bank, investment, and insurance accounts for easy retrieval. With crypto assets, it is crucial to leave instructions detailing which coins you own, where they are stored, and how to access them (assets may never be recovered without your private key).
Disclaimer
Advisory services are offered by Glass Lake Wealth Management LLC, a Registered Investment Advisor in Illinois and North Carolina. Glass Lake is an investments-oriented boutique that offers a full spectrum of wealth management advice. Visit glasslakewealth.com for more information.
This article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory, legal, insurance or accounting services or an offer to sell or solicitation to buy insurance, securities, or related financial instruments in any jurisdiction. Certain information contained herein is based on or derived from information provided by independent third-party sources. Glass Lake Wealth Management believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions in which such information is based.