Estate Planning is the topic of countless books and the specialty of lawyers who have made a career out of helping clients navigate some very confusing territory. Today, I’d like to offer you my 101 version to give you a start in this process and help you know what questions you should ask if you see an estate planning attorney.
To simplify this topic a bit, I’ll break this topic down to three sub-categories; wills, designated beneficiaries, and trusts.
A will is a relatively inexpensive (sub $500) first step in the proper handling of your affairs after your death. In it, you make known your desire for guardianship of your children, as well as who you want to get your possessions after you die. In your will you also need to name the executor of the will. Ideally, this is someone whom you trust and has the ability to serve in this position. Upon your passing, the executor needs to settle the finances of the estate including the payment of any debts and taxes, collection of any money owed to the estate. And finally, disburse the assets according to the terms of the will.
Often the same attorney who prepares your will also will offer you what is called a “living will,” the document that spells out your wishes regarding life prolonging medical treatment. Don’t pass on this important document; it will save your family from a very tough decision.
A little discussed aspect of estate planning, the designated beneficiary may be the main conduit for much of your estate to pass. This refers to how accounts themselves can have a beneficiary which takes priority over any wishes expressed in your will. Retirement accounts including 401(k), IRA, and others are in this category. It’s important to consider this for a number of reasons. As time passes, you might have updated your will. That’s great, but did you update your 401(k) at work, or does it currently list the spouse you had 25 years ago? The people listed as beneficiaries on the account are who will inherit your money, not the people listed on your will. Not all 401(k) administrators will allow a non-spouse to take withdrawals over their lifetime, some offer a maximum 5 year payout. This is one of the factors you should consider when leaving money in the 401(k) of a former employer or transfer it to an IRA. The bottom line – make it a habit to check your beneficiaries on your retirement accounts or any accounts with “pay on death provisions.” This will save those who survive you from wondering why a former spouse or friend you haven’t spoken to in decades was the recipient of your account.
With the exact details of the estate tax in a bit of flux right now, no one can be certain what the exemption will be or whether or not there will even be an estate tax next year. Still, there are a number of uses of a trust that are somewhat independent of such changes in the laws. First, the Special Needs Trust (Also called a Supplemental Needs Trust) allows you to set aside money for a beneficiary who has a disability. If they received the funds outright, they might be disqualified from receiving government assistance. This is a way to leave them additional funds without impacting their benefits. Another common use for a trust is a Spendthrift Trust. You may feel that one or more of your beneficiaries isn’t ready to handle a windfall. This trust will allow you to leave the money in a way that will restrict withdrawals, typically to 5% of assets in the trust. Wording can be included to provide for unusual expenses such as medical bills or home repairs at the discretion of the assigned trustee. In April ’08 I wrote a post titled “On my death, please, take a breath” in which I describe a situation where such a trust could have helped avoid a large tax bill.
This article is an introduction only. The issues surrounding estate planning are often very sensitive. Wherever family and money are concerned one often needs to tread lightly. If you have a specific situation you’d like to discuss, ask in the comments as people are happy to help, but keep in mind, ultimately you need to work with a professional to be sure your will and trust is properly executed.