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What Happens When You're Gone? Estate Planning Basics

May 04, 2015
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Do you have a comprehensive estate plan?

It may not be the most polite question to ask, but as a financial planner I know the importance of discussing all of my client's potential financial issues, even the difficult ones. Estate planning and preservation is vitally important to preserving your legacy and your family's financial picture once you're gone. Because it's a topic that no one likes to discuss, there's a general lack of education about estate planning. I'd like to correct a few of the myths that are out there.

Estate planning isn't just for the very wealthy, as Ivory Johnson explains in an article for CNBC. Estate plans ensure the financial security of your family after you've passed, from your final arrangements to the distribution of your material possessions. Even if you don't have a lot of land or expensive possessions, it's still important to make arrangements for what will happen to them. 

Estate plans are generally comprised of a variety of directives, all of which are usually either constructed or reviewed by an estate planning attorney and then enforced by an executor. Wills, trusts, living wills, and even succession planning are all important elements of an estate plan. Financial advisors play a vital role in helping their clients determine the best course of action for their unique situation.*

Your Will and Living Will

As Thomas and Robert Fross write in an article for Forbes, "A will is a legal document that communicates how a person wants his or her estate to distribute assets after death." The will is the most common starting place in estate planning, primarily because of the low cost to set it up and alter it. However, it does have some drawbacks.

Many individuals assume that a will alone is enough to protect their family, but this usually isn't true. A will serves as a statement regarding what you wish to be done with your assets, but it does not construct any protection for these assets, nor will it necessarily be able to be followed. If a will is made without the aid of an attorney or financial adviser, it may not even be applicable to your actual financial situation. For instance, many families are blindsided when they discover that their loved one's debt exceeded their assets, thereby rendering their will's asset allocations completely moot. To be truly valid, a will also needs to be witnessed by at least two individuals.

A living will is another important part of an estate plan. It governs what you want to happen should you be incapacitated or unable to make decisions for yourself while still living. Your living will should list someone who will have power of attorney in addition to someone who will be able to make medical decisions for you. These two do not need to be the same person, although they often are.

The Value of a Good Trust

Trusts have a couple of major benefits: they act as a tax haven and promote more responsible spending. Through a will, a parent can leave a large lump sum to their child after their passing, but their child will be taxed on the full amount of the lump sum. There also may be no limiting factors regarding the child's use of the funds, which can lead to irresponsible spending. A trust, on the other hand, can be awarded with stipulations — such as a monthly stipend contingent upon good grades or may designate an age at which the designee can access the money (e.g., 25 years old).

Establishing a trust is more expensive than a will, but trusts are more flexible and have additional benefits, such as maximizing estate tax exemptions and avoiding probate court. Of course, they may not be necessary for everyone. CNNMoney references Mike Janko, the executive director of the National Association of Financial and Estate Planning (NAFEP), who recommends trusts for families with a net worth of over $100,000.

There are several types of trusts that address different needs. Some are "revocable" (can be altered) and others are "irrevocable" (cannot be altered). A "credit-shelter trust" shields inheritances from estate taxes, and a "generation-skipping trust" is designed to pass your assets along to grandchildren. A certified financial planner is a great asset when determining which kind of trust will meet your families unique financial needs.

Plan for Your Family's Future

An estate plan can be minimalist or extensive, but either way it usually begins with a solid will and the development of one or more trusts. A financial planner and an estate planning attorney can help you develop an estate plan of your own — just make sure to keep it updated on a regular basis. An estate plan is an investment in the financial well-being of your family, and a well-crafted estate plan will ensure that they are taken care of even after you pass. It may not be something you want to think about, but it's worth it for the peace of mind you'll have knowing you've planned for your family's future.

What plans do you have in place to protect your family's financial future? Share your advice by tweeting @Lindsey2Wealth!

*Securities America and its representatives do not provide tax or legal advice. Please consult the appropriate professional regarding your specific situation.