What is estate planning? Should I care?

*For education and reference only. I’m not an attorney.

You Can Control the Future

The term “estate planning” sounds very official and a bit off-putting, but it’s actually much less intimidating than you might think! The point of “estate planning” is really to just allow you to plan what happens to your money and your stuff (or more officially, your “estate”) when you die (eventually, in the future) ahead of time.

Plan Ahead Ahead of Time

Planning ahead makes it much easier for everyone you love left here on earth to understand your financial life and make decisions on what happens to everything. But it’s also much more than that- you can also plan for what happens if you are still alive but can no longer make decisions for yourself (really fun to think about, I know).

It’s Normal

Doing “estate planning” is a Very Normal process and trust me, everyone else is also doing this, and if they’re not, they should be. It absolutely does not have to be complicated or very extensive, but it’s important to do so all the same.

This guide will introduce you to the various terms involved in “estate planning” and what it actually entails. Let’s start with the easiest-to-do pieces first.

Beneficiary Designations

Some of your accounts (like retirement accounts, life insurance, etc) are actually already set up to transfer to whomever you want when you die. It’s “built-in” to the current law that you state this person(s) through your account. This is called a ‘beneficiary designation’. These types of accounts are generally transferred to this person (or “beneficiary”) immediately upon being presented with a death certificate/information.

The point of this capability is so that the money in these accounts is transferred to your designated beneficiaries much faster than the rest of your stuff (which takes more time to organize) and can be used for last expenses, immediate transition needs, etc. It’s generally a bad idea to designate a minor as a beneficiary on these accounts because that makes the distribution of money take longer and more complicated (and thus defeats the purpose of something like life insurance).

So right now, list out your retirement accounts (Traditional/Rollover IRA, 401(k), Roth IRA, etc) and any life insurance policies you may have, and log in to each one to determine who your beneficiary is.

Make sure that you have at least one primary beneficiary and one contingent beneficiary. Especially if you are a couple, you want to make sure your account smoothly transfers to the contingent beneficiary if your primary beneficiary is no longer around either.

Documents and Definitions

While you may have heard of a will before, there are actually three other documents that are actually just as or more important than a will. They are:

Springing durable (financial) power of attorney - designates someone to make financial decisions (move money, pay bills, etc) for you if you become somehow incapacitated and unable to make decisions for yourself
Healthcare power of attorney - designates someone to make healthcare decisions for you (think life support) if you can no longer do so. Make sure this document states this person is allowed to visit you in the hospital (especially for any non-family members).
HIPAA Release Form - another medical-related document. This document lets someone access your medical information, which some doctors and hospitals require even with a healthcare power of attorney. And well, we all need information to make decisions, so put this document on your list too.

Let’s pause. Doing ok so far? These three documents we’ve just covered are arguably more important than a will for some people and they apply to pretty much anyone over the age of 18 (aka these are “going off to college” documents!). So if you’re wondering if they apply to you, well, they do. To make them official, they may or may not require a notary or other signatures depending on your state.

Will - Also called a “last will and testament”. This document is important to designate a guardian for your children if you have them, and the rest of your accounts and belongings not already transferred through a beneficiary designation or (possibly a) joint account. In this document, you also designate someone called an “agent” or “executor” that handles the distribution of these items.

The same easy process as the two documents above, a will can be downloaded for free from a number of websites, such as LegalZoom, although an attorney can be incredibly helpful here as well. After you die, your will goes through a process called “probate” in which the courts review and generally guide the process of distribution. This process generally takes quite some time to complete (think at least months).

Accessibility

While getting these documents completed is a fantastic accomplishment, it’s actually really just the starting point. The next step is making sure that all of your trusted designees (agents, executors, etc) know that they’ve been designated (better yet, let them know ahead of time) and that they know where to find these documents. A conversation can be just as powerful to communicate your desires as an official legal document. When these documents are needed, they are often needed urgently (think: emergency life-saving medical procedures) and so it is fantastic if the original documents are in an accessible place (like your wallet!) and/or that the designees have copies already.

Other Good Things to Know

Nothing beats a good conversation -

Like this one, right?! Having just discussed accessibility, it’s relevant that sometimes the best way to communicate your wishes and immediate desires (or discover those wishes of your parents!) is to talk about it. Sometimes awkward, yet so important - it’s worth it.

Digital assets -

Often missed in the estate planning process, digital accounts (think Facebook, Instagram, etc) can be just as important to consider. Different companies have different policies for what happens to your account, and it is worth thinking about and outlining what you would like to happen with these accounts in your will.

How joint accounts work -

Having a joint account (specifically, “joint tenancy with rights of survivorship, or JTWROS”) can also supersede your will and automatically pass to the other joint owner upon your death, very similar to the retirement accounts discussed above.

Community Property States v Non-Community Property States -

This is a characteristic of every state - some states are what is called “community property” and others are what is called “Common Law” (“equitable distribution”). This characteristic governs what happens to a spouse’s accounts in divorce and death.

Trust -

If you’ve heard of a trust before, you’re probably wondering what it is. Different types of trusts can be used for different types of ownership-transfer goals. Generally, a trust is a substitute for a will, that is private and generally faster than going through probate. Depending on your state’s probate process, the complexity of your financial situation, and your privacy desires, it could be worth it to set one up instead of a will.

Assets outside the U.S. -

Generally not covered by your will (because those are U.S. and state laws) and governed by the specific country or region where they are located.

Hope you find these tips helpful! Need help incorporating these plans into your financial life or making sure you have everything set? Schedule a free 15-minute intro meeting with Sarah today here!

Sarah GerberOctober 20, 2020