Four Essential Estate Planning Ingredients

Think of an estate plan as a blueprint for what happens after your incapacitation or passing. Imagine your family making difficult medical decisions on your behalf, handling important financial transactions, caring for your children, or the other less desirable option of spending time and money for the court to make decisions for you. The obvious desirable choice is the first option – those who know and care for you are those you want fulfilling your desired wishes when you are unable to do so yourself.

There is a common misconception among many that a Will is the only deciding document and solely what protects you from probate. Although a Will is important, and one of the first things people think of when it comes to estate planning, it is just one of the four important pieces of a bigger plan that protects your assets and wishes in addition to making a difficult time a bit easier for loved ones.

Because home is where the heart is, what better analogy to use than building a home when it comes to building your estate plan?

Lay the Foundation – Living Trust

The foundation of any good estate plan starts with a Living Trust. A Living Trust is the source through which you will communicate with loved ones your wishes related to managing and transferring property after your death or incapacity. A Living Trust will be revocable (amendable), as long as you have capacity to make changes, but becomes irrevocable (set in stone) after your death.

While a Will can also be used to communicate these wishes, a Trust is preferred in many states, because property directed by the Trust passes outside the often expensive and time-consuming process of probate. If you don’t have a Will or Living Trust, your state’s default rules determine who receives your assets that don’t have beneficiary designations or aren’t jointly owned.

Just like when laying the foundation on a new home, there are additional steps that must be taken after drafting a Trust to complete the job.  For your Trust to direct assets, you must fund the Trust by transferring title of such assets to it. Titling assets accordingly lets financial institutions and your loved ones know that there is a thoughtfully-constructed rulebook that needs to be followed.

Note: Keep in mind that while certain assets, such as retirement plans and life insurance, have beneficiary designations, others do not. Before getting your Will or Trust in place, you might be able to protect your wishes with regard to these other assets by establishing transfer on death (TOD) instructions on the accounts. TOD rules vary by state, so work with your financial advisor to make sure all of your accounts have allowable designations.

Whom Will You Choose? – Will

Once you have officially developed a Living Trust, there are still several ingredients that need to be added when it comes to completing your estate plan. Continuing with the idea of building a home, think of drafting a Will as similar to choosing a general contractor; you will choose a key person to carry out some important tasks to ensure that nothing falls through the cracks.

A Will is a legally enforceable document that might be used to communicate your wishes related to managing and transferring property after your death or incapacity.  But, in states like California, Arizona, and Nevada where probate is difficult and assets are primarily distributed through a Trust, you still need a Will for other important reasons. Your Will nominates guardians for you children, an executor to funnel assets left out of the Trust into the Trust, and a conservator to act on your incapacity. Without a Will, the court will decide who is best fit to act as guardian for your children, how assets not directed by beneficiary designation or Trust will pass to survivors and who will act as your conservator.

In an effort to avoid an awkward scene similar to the one in the movie Life as We Know It, be sure to ask those you want to serve as key players if they are willing to take on the responsibility and provide them with copies of key documents appointing them to act. Just as clearly as your contractor knows what is expected of him, your loved ones should know what is expected of them. If you want to learn more about creating a Will, check out our content piece Where There’s a Will, There’s a Say.

Your Power Tool – Power of Attorney

By creating a Trust and a Will, you have planned well in the event of your death. However, a complete estate plan also includes arrangements in the event of your incapacitation.

Your healthcare power of attorney (also known as an advanced healthcare directive) names the person(s) you have chosen to make healthcare-related decisions on your behalf and who is responsible for ensuring that all care meets your wishes. This document also allows you to let others know what medical treatment you want, to specify your preferences about pain relief if you are terminally ill or permanently unconscious, to express your wishes about prolonging life under certain circumstances, and to outline your wishes about organ donation and other final arrangements.

Your power of attorney for financial matters allows you to authorize someone else to make financial decisions if you are unable to do so. While the successor trustee of your Trust will be able to handle a good portion of financial matters, some actions, such as signing tax returns or transacting on retirement accounts, require specific appointment. Among other things, your appointed “agent” might be delegated to pay your everyday expenses, watch over your investments, file your taxes, and/or collect retirement plan or insurance benefits.

It is important to update your power of attorney document periodically to ensure that no one is left doubting that it is the most current version. Some financial institutions will not honor documents that are older than ten years. Also, just like other key players in your estate plan, it’s important to ask those that you would like to serve if they are willing to take on the responsibility and provide them with copies of your most recent documents.

Note: To ensure your appointed agent(s) can make informed decisions about your healthcare, it is important to release your medical information using a Health Insurance Portability and Accountability Act of 1996 (HIPPA) release form, which should be incorporated by your attorney. Review your plan to make sure this important document is in place.

Bring in the Furniture – Funding Your Trust

When you’ve finally built your foundation, put up the walls and installed all the plumbing, your home is nearly ready. There is one more thing to take into consideration though… what furniture are you putting inside in turn your house into a home? You want your home to have the right feel, which means you need to put some important thought into what pieces of furniture to select and what shouldn’t be included to create your desired ambiance. The same can be said for the considerations you should take into account when it comes to funding your Trust.

Review the considerations below before putting all of your assets in the name of your Trust or naming it as a beneficiary.

IRAs/Retirement Plans: IRAs and retirement plan accounts cannot be titled to the name of your Trust. Naming the Trust as the beneficiary is the alternate way for the Trust to direct the disposition of these assets, but, be careful! Naming your Trust as the beneficiary of your 401(k), IRA, or other retirement plan may be a big mistake (big, huge)! The Trust might require beneficiaries to take everything out of the plan as taxable income within five years of your death, rather than allowing them to stretch distributions – and ordinary income tax – throughout their lifetimes.

Does this mean that I should never name my Trust as the beneficiary of a retirement plan? No. You might need the Trust to control how your retirement assets are received by minor beneficiaries or beneficiaries with creditor, spending, or substance-abuse problems. It is possible to name the Trust as a beneficiary without the negative consequences previously mentioned, if you are using a Trust specifically created for that purpose. Not sure? Ask your attorney for specific beneficiary directions and check whether who you have named as beneficiary of your retirement plans matches the instructions provided.

Not Funding at All: Putting the wrong kind of furniture in your house can completely mess with the aesthetic but putting hardly any furniture at all is not practical either!  In the same way, failing to fund your Trust is a great way to ensure that it doesn’t function properly. Funding a Trust is the process of retitling assets and property into the name of the Trust. It’s your way of telling the world: “If something happens to me, look to this Trust for my instructions on what to do with this piece of property.” Failing to fund a Living Trust is one of the most common estate-planning mistakes. Again, work with your attorney to retitle property as instructed.

Note: Common assets titled in Trusts include real estate, business interests, and some cash and investment accounts, but it’s not for everything. The title of your house might revert to joint or individual title following a refinance, so be sure to retitle it to your Trust. Also, make sure your Trust is named as an additional insured on your homeowners’ policy.

Estate Planning is just as time-consuming as building a house. It requires patience, a great deal of thought and most importantly Trust in the people around you to get the job done. As you look forward to a new year, take the time to plan out this important life step – to ensure you have all your bases covered for the future so that the plans are laid out clearly and are very easy for those you entrust to follow.

If someone you know could benefit from a conversation with one of our advisors, please make the connection. We would be happy to provide a complimentary consultation.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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