Estate Planning 101

Estate Planning 101

By: Vanessa McElwrath, CFP®, Wealth Management Partner

There’s no doubt about it- estate planning is a sensitive subject. The issue involves two taboo topics most of us avoid discussing: death and money. As a result, estate planning often gets swept under the rug and put off to be dealt with a later date. Although estate planning can be a daunting task, a well-informed estate plan is essential, ultimately providing peace of mind and protection for an individual and the loved ones left behind.

Estate Planning Basics

Creating a well-designed estate plan is a critical step in the development of an overall financial plan. It’s important to work with an attorney and your wealth advisor to develop your plan and legal documents associated. The attorney will guide you through the creation of fundamental estate planning documents while your wealth advisor can ensure the plan aligns with your long-term goals and that account titling and listed beneficiaries is coordinated with any legal documents. Although each estate plan is tailored to the individual, there are some essential documents common to most plans:

  1. Last Will and Testament: Even for estates that seem straightforward or have few assets, a Last Will and Testament is essential. A Will provides a detailed list of instructions for how an individual’s probate property should be distributed after he or she dies. It also designates a guardian for any minor children and nominates an executor for the estate. It is the executor’s responsibility to carry out the wishes of the deceased.It’s important to note that while a Last Will and Testament dictates instructions for probate assets, it does not set out terms for distribution on “non-probate assets.” Instead, these are assets that pass to a beneficiary named on the document that was signed when the asset was created. Examples of non-probate assets include:- Life Insurance Policy/Annuity/IRA/401k with a properly designated beneficiary
    – Bank accounts listed as Payable on Death (POD), Transfer on Death (TOD), or Joint Tenants with Rights of Survivorship (JTWROS)
    – Real or personal property owned as Joint Tenants with Rights of Survivorship (JTWROS)
    – Assets put into a properly funded trust
  2. Durable Powers of Attorney: A financial power of attorney allows an individual to name a trusted person to handle all business affairs, including financial decisions should they become incapacitated. A medical power of attorney gives authorization to make health care decisions if the individual is unable to do so. Because health care decisions are more of a personal matter, a close family member or friend is the typical choice to serve as a health care power of attorney.
  3. Advance Medical Directive or Living Will: A Living Will specifies an individual’s wishes about certain medical care and life-prolonging procedures. This document can clearly define the wishes of the individual to eliminate any uncertainties or family burden.
  4. Revocable Living Trusts: A revocable living trust is a legal document that covers your assets when you are alive and well but also after you die. One of the main reasons people use a revocable living trust in lieu of a Will in their estate plan is to avoid the court system. Instead of going through the probate process, your estate assets are directly transferred to your beneficiaries specified in the trust agreement upon passing. This is particularly appealing to those individuals who value privacy. On the other hand, there usually is more work and costs associated with setting up and re-titling assets into a revocable living trust. It is a tradeoff that must be considered based on your preferences and needs.

No Will….Now What?

If you die without a will, you are said to have died intestate. Texas law will then dictate how your probate property will be distributed, and the rules for distribution are not quite as straightforward as you would think.

For example, a common scenario is one in which a person dies leaving behind a spouse and children. In such case, Texas law provides that the surviving spouse will receive all the community property and one-third of the deceased spouse’s separate personal property. The remaining two-thirds of the separate personal property is divided equally among the child or children of the deceased. The surviving spouse is also entitled to possession of real estate for life, with the balance going to the children or descendants upon that surviving spouses’ death. These rules set forth by the state can certainly create some complications for the surviving spouse. Things become even more complicated if minors are involved or if the decedent had a blended family with children from different marriages.

Furthermore, having an estate settled in probate court creates additional cost to the estate and can also be a time-consuming and stressful process during an already fragile time. Because of this, a Last Will and Testament is essential, even for estates that seem straightforward or have few assets.

Reviewing & Updating Your Plan

Once you have invested the time and energy to develop an estate plan, you can’t simply stick it in a drawer and forget about it. Over time, life events will occur affecting your plan. For instance, you may get married or divorced, have children or grandchildren, lose loved ones, move to a new state, or buy or sell a business. All these events, as well as external factors such as changes in tax laws, could significantly impact your well-thought-out plans. Your wealth advisor at ML&R Wealth Management understands the importance of reviewing your plan on a regular basis, along with your other trusted advisors, to ensure your estate planning goals are being met.

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