By: Vanessa McElwrath, CFP®, Wealth Management Partner
There’s no doubt about it — estate planning is a sensitive subject. Learning more about what estate planning is 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 at 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.
Family 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 the associated legal documents. The attorney will explain what estate planning is and 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 are coordinated with any legal documents.
Although each estate plan is tailored to the individual, there are some essential documents that are common to most plans:
- Last Will and Testament: Even for estates that seem straightforward or have few assets, a Last Will and Testament is the most essential part of what estate planning is for most people. 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 in family estate planning, 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/401(k) 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
- Durable Powers of Attorney: Now that you know a little bit about what estate planning is, we’ll move on to discussing the person who puts this plan into action. 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 the 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.
- Advance Medical Directive or Living Will: To distinguish what estate planning is during life and death, 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.
- Revocable Living Trusts: When learning about what estate planning is, fewer people know about this last kind of document. However, it can be just as important as the other three. 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 family estate planning 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?
Even if you know what estate planning is, that doesn’t guarantee that your wishes are fulfilled until you go through the process with an attorney. If you die without taking care of family estate planning, 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 a 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 spouse’s death.
Intestate Laws Can Get Complicated
These rules set forth by the state demonstrate why estate planning is important — intestate laws can certainly create some complications for the surviving spouse. Things become even more complicated in considering 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 an additional cost to the estate and can also be a time-consuming and stressful process during an already fragile time. Because of this, completing your family estate planning with a Last Will and Testament is essential, even for estates that seem straightforward or have few assets.
What is an Estate Planning Update and Why Does it Matter?
Once you have invested the time and energy to find out what estate planning is and 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 approach to estate planning and make it difficult for what is important to you to be put into practice.
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 met. Contact our team to schedule a complimentary estate planning consultation and put your affairs in order today.
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