In recent years, estate planning has seen a strong focus on estate tax exemptions and potential estate tax savings from various lifetime wealth transfer techniques. But for most individuals, their “core” estate plan still controls the bulk of their assets. This is where key estate planning information is collected and decisions are made around titling and disposition of assets. It’s also where important personal decisions are made such as who can make healthcare decisions for you and who will care for your children if you can’t.
The core plan isn’t a “set it and forget it” situation. It’s important to revisit your plan periodically to ensure your overall estate plan and documents evolve with your goals and life changes.
Update your personal balance sheet and consider asset titling
Your personal balance sheet is the first step in maintaining an effective estate plan. It’s a snapshot of your assets that are used for income and estate tax planning and making decisions such as when and how a child should receive assets. With an accurate picture of your financial situation, you can understand if your plan is meeting your goals and whether tax planning opportunities are being overlooked.
The personal balance sheet also tracks how your assets are titled and who the current beneficiary designations are for each. There’s a common misunderstanding that if someone has a will or revocable trust, all their assets will automatically be distributed according to those documents. However, inheritance of assets is also determined by the titling of assets and, in some cases, beneficiary designations.
For example, a jointly titled asset such as a house may pass directly to the surviving co-owner rather than via the deceased owner’s will. Similarly, the proceeds from a bank or investment account may pass to the named beneficiary outside of the will. This can create confusion and unintended outcomes, so it’s important to ensure that asset titling and beneficiary designations align with your goals.
Strategic asset titling also helps avoid having assets pass through the probate court. The probate process can create additional costs to the estate due to administrative complexity and generate privacy concerns if information related to the asset such as the fair market value becomes public record. For example, if a portion of ownership in a closely held business is required to go through probate, certain information becoming public could put the business at a competitive disadvantage.
Review core estate planning documents
It happens all the time: you consult with an attorney, sign the documents, and then store them away to collect dust as the years accumulate. However, the decisions you made back then may not be the decisions you’d make today. That’s why it’s important to review — and potentially update — your estate planning documents at least every three to five years, and after all life-changing events such as marriage, birth of a child or grandchild, sale of a business, relocation to a different state, or retirement.
Here are the core estate planning documents to look at and some questions to ask in your review:
- Healthcare power of attorney: This document allows you to authorize an individual (or individuals) to make healthcare decisions for you when you can no longer make those decisions yourself. There are additional healthcare-related documents such as a living will that may also be included.
- Questions to ask: Am I comfortable with the person I selected as my agent? Did I name a successor in case my first choice is unable to help?
- Financial power of attorney: This document allows you to authorize an individual to make decisions as it relates to assets you own.
- Questions to ask: Am I comfortable with the person I selected as my agent? Did I name a successor in case my first choice is unable to help?
- Last will and testament/revocable trust: Generally, the will and the revocable trust control the distribution of your assets upon passing. All adults should execute a will to avoid having state law dictate who receives their assets when they pass away. A revocable trust may be beneficial depending on your individual circumstances. These documents specify not only who will receive the assets, but who is responsible for managing the assets (i.e., a personal representative or trustee) and ensuring the estate plan is followed. For some families, these documents contain provisions for selecting a guardian for minor children. Most post-death planning is done through these documents so they typically require the most time and thought to design and prepare. Considerations include:
- Beneficiaries: The beneficiaries are the individuals and charities that inherit assets from your estate.
- Questions to ask: Do I have a good understanding of who receives my assets, including any estate taxes owed, how much each beneficiary receives, and how each beneficiary will receive the inheritance (i.e., outright or in trust)? If so, am I still comfortable with the outcome?
- Trustee/personal representative: The main functions of the trustee and personal representative are to manage the assets in accordance with the legal documents and applicable law. (The trustee oversees revocable trust assets, and the personal representative overseas assets passing through the will.) Learn more about trustee/personal representatives from Jonathan Grossman at our Wealth Management 2022 Virtual Summit, which you can view on demand.
- Questions to ask: Am I comfortable with my choice of trustee and personal representative? Did I name a successor in case my first choice is unable to help?
- Guardian for minors: The guardian makes decisions relating to care and finances of minor children.
- Questions to ask: Am I comfortable with the person I selected as guardian? Did I name a successor in case my first choice is unable to help?
- Beneficiaries: The beneficiaries are the individuals and charities that inherit assets from your estate.
If you don’t have a core estate plan or your plan is out of date, it can create additional headaches and stress for your loved ones in an already stressful time. As the year winds down, take the opportunity to review your plan and confirm that it’s up to date and accurately reflects your current personal and financial situation. And as college-aged and older children visit for the holidays, encourage them to get their estate planning essentials in place and ensure healthcare powers of attorney are up to date.
