Reviewing Your Estate Plan Essentials
You need a complete, up-to-date estate plan now more than ever, regardless of the value of your estate. Estate planning never was all about taxes, though people thought it was back when estate taxes clipped many estates.
Because few estates will face a federal tax burden, we can focus on the real issues of estate planning. Failure to have a plan or to have a quality, updated plan likely will lead to dissipation of much of your lifetime’s wealth by forces other than federal taxes. A nonexistent or inadequate plan is an impediment to achieving your plans and goals for the wealth and often leads to family disputes and disharmony.
Every estate has a host of significant issues other than federal taxes that need to be addressed.
Medical care. That’s right. Medical care is a vital part of a good estate plan. The plan should define how your medical needs will be addressed in different circumstances.
First, you’ll need documents that provide which decisions will be made and who will make them in case you aren’t able to. That means you need a medical power of attorney or medical care directive and perhaps a living will. You also should consider if you want documents such as a do-not-resuscitate order. You need to focus on both the terms and scope of the documents and, especially with the power of attorney, selecting the person or people to make decisions. You can find details about these documents in the Estate Watch section of the Archive on the members’ web site.
The financial aspect of your medical care also should be covered. Be sure you have adequate insurance or resources to cover most types of medical care.
Do you have or should you buy long-term care insurance? If not, are you planning to qualify for Medicaid for any long-term care needs, or do you plan to meet the costs from your assets and income? Have you looked at policies that combine life insurance or an annuity with long-term care benefits? Neglecting this issue too often leads to a burden on loved ones, an estate being depleted to pay for care, and sometimes the next generation’s nest eggs being depleted.
Avoiding disputes. It doesn’t matter how much or how little wealth you have. When an estate owner doesn’t develop a plan, conflict and chaos often follow. Children, even adult children, can fight over how assets are divided and managed. The presence of a second spouse or other players can make the conflicts worse.
You shouldn’t be content with thinking “the kids can work it out.” Any estate planner will tell you they often don’t. Even when an estate doesn’t seem to be worth much, there’s a need to clearly state how you want it divided and handled. In most families, there’s usually at least one person who’ll look for something to fight about with the others if you leave an opening. Almost every estate planner can tell you stories of families spending far more on legal fees than an item or estate was worth.
Probate. You might not be worried about taxes, but the probate process can cost a lot of money and delay settlement of your estate. Probate is the system that ensures your debts are paid, your assets are distributed how you intended, and heirs have clear legal title to assets. Some states have a streamlined and less expensive process, at least for smaller estates, known as the Uniform Probate Code. But a number of states still use the older, expensive, cumbersome process. You need to find out which type of state you live in and what would be involved in probating your estate.
When the state has an unattractive probate process, consider avoiding the probate process and how to do it. You can use a living trust, partnerships, limited liability companies, joint title, and other tools. Each has advantages and disadvantages. Discuss them with an estate planner to select the tools for you.
When you live in or have property in more than one state, the processes of both states must be considered. The bulk of your estate will be governed by the state in which you are resident, and any real estate will be controlled by the state where it’s located. To avoid probate in two states, you might want out-of-state real estate owned through a trust or limited liability company instead of in your name.
Beneficiary forms. IRAs, annuities, employer retirement plans, life insurance, and some other assets aren’t affected by your will. They are inherited by whoever’s named in the beneficiary designation forms. Be sure these forms in both your records and those of the firm sponsoring the asset reflect your current wishes. If you don’t do anything else toward estate planning, take this easy step.
Care of others. You might be helping or anticipate having to help a relative or other person. It might be an elderly parent or other relative. It could be a child or grandchild that has needs. If so, you probably want to develop a plan to ensure they have help when it’s needed. That might mean buying life insurance or establishing a trust for their benefit.
Asset management. You’re probably managing your investments and other assets well. You’re following my advice and maybe considering other advice as well. You probably also determined who you want to inherit and benefit from the investment portfolio and other assets next. But who will manage the portfolio? Is your surviving spouse or other member of your family capable? Do they have the knowledge and skills to manage your assets and make them last a long time? Have you even discussed this with them?
If not, you need a plan.
One option is to lift the burden from the loved ones, just as you have for years. Plan to have a money manager invest the assets.
If that’s your plan, find a money manager now. Don’t expect loved ones who don’t know how to manage money to be able to select a good money manager.
You can test drive a manager by giving one or more managers a portion of your portfolio to manage now. That lets you see not only how they perform but how well they communicate and provide customer service. They’ll be in place for you to examine, and over time you can let your spouse or other heirs know that you believe the manager is good and that they should continue to use the firm’s services when they inherit the portfolio. If it’s the wrong manager, you’ll find out soon and be able to make another choice.
Succession. When you own businesses, real estate, or complicated assets such as a collection, succession planning is a must. Look for someone in your family who’s able and interested in continuing management of the assets. Then, plan the transition in management or ownership. Don’t wait. With businesses and complicated assets, it often takes five years of planning for a succession to be successful.
When there’s no suitable successor in the family, you might look for one or more associates who can continue management. They might want to buy the business from the estate or be willing to manage it while family members continue ownership. Or you should develop a plan for how the asset will be sold and the proceeds distributed to your loved ones.
You need to develop a succession or sale plan now. Too often, when a plan isn’t in place the value of the asset isn’t maintained during the transition. The estate doesn’t receive the full value the business once had. Sometimes the entire value of the asset dissipates.
You might have other issues to address, but these are the most common non-tax estate planning issues. Some of these you might be able to resolve on your own. But it’s best to meet with an experienced estate planner and discuss the goals and ambitions for your wealth, family, and the rest of your life. Then, you can identify the issues and develop a plan.