If something happened to you tomorrow, would your family know exactly what to do … or would they be left guessing?
Without a plan, your estate might go through probate, a process that can take months (or longer), incur legal costs and make your personal financial matters part of the public record.
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As a longtime financial adviser, I have to admit I wasn’t surprised when I saw those survey results. Through the years, I’ve learned that even the most diligent and caring families underestimate the importance of legacy planning as part of their overall financial plan.
Some just don’t want to think about it, or they haven’t gotten around to it. Many simply can’t imagine that they have enough assets to justify the time, effort and cost that goes into documenting their preferences.
But having a legacy plan is one of the most thoughtful things you can do for your loved ones. If you can make these consequential decisions now — and get it all down in writing — your family and friends can help avoid the anxiety of having to guess, fight for or fight over what you might have wanted.
What are some legacy planning basics?
A legacy plan can range from a few basic documents meant to help ensure that your medical, financial, and other wishes are clear to a more detailed plan that can help shield your estate and your beneficiaries from taxes and the probate process.
(Note: The following information is provided for educational purposes only and is not intended as legal advice.)
Because estate planning documents must be drafted based on your individual circumstances and state laws, you should consult a qualified attorney to create or complete the components of your estate plan.
Some common components include:
A basic will
A will allows you to:
- Name your beneficiaries
- Appoint an executor who will be responsible for carrying out your wishes
- Choose the guardians who will care for your children
- Leave charitable gifts to the causes you care about
Contrary to what many people believe, a will usually won’t exempt your estate from going through probate, a court-supervised process that includes ensuring that your debts are paid and that your assets are properly distributed.
But a will provides guidance and more control. If you die intestate (without a will), the court will follow state laws to decide how to distribute your estate.
A living will
It’s a legal document that must meet state requirements, and it won’t take effect until doctors determine you can no longer convey your wishes about things such as pain management, resuscitation or end-of-life care.
A healthcare power of attorney (POA)
With this document, a chosen representative whom you trust can communicate with healthcare providers and access medical records to make informed decisions.
A financial POA
The document can be tailored to grant specific powers or provide broader powers based on your preferences. Unlike a regular POA, a durable POA remains in effect if you become incapacitated and can no longer make your own decisions.
Other must-dos to help avoid probate
Along with these documents, legacy planning moves can also help your heirs avoid the stress and expense of the probate process:
- Name your beneficiaries. Never assume your money and other assets will make it to the people and places you have in mind. Make sure your beneficiaries are noted (and regularly updated) on all your accounts, property deeds, insurance policies, etc.
- Set up payable-on-death (POD) designations. Taking the time to fill out a POD designation form with your bank can keep your loved ones from having to wait months or longer to access the money in your accounts. Instead of going through probate, the funds in your checking, savings and other accounts can be automatically transferred to the named beneficiary when you die.
- Preparing transfer-on-death (TOD) designations. A TOD designation is another legacy-planning tool that typically allows assets to pass directly to beneficiaries without having to go through the probate process. The main difference is that a TOD account typically applies to investment accounts or individual holdings rather than bank accounts, and there are usually more steps involved in accessing the account(s).
With a TOD (vs just including an inheritor’s name on a property deed or an account), the asset’s basis will be automatically adjusted, or “stepped up,” to its fair market value on the date of the transferer’s death, which can help mitigate capital gains tax.
Let’s talk about trusts
You might have heard that a trust is a must when it comes to legacy planning. Setting up a trust can make sense for many people.
Besides potentially offering significant estate tax benefits, a trust can provide other protections. The assets in your trust won’t be part of any probate proceedings, which means your beneficiaries should be able to receive them faster.
trusts don’t become part of the public record, so it’s a good way to help protect your family’s privacy.
There are two broad categories of trusts, and each has its pros and cons:
A revocable trust allows you, as the grantor, to make changes to your trust or revoke it if you should choose to do so at some point. You can remove beneficiaries, add new ones or modify how assets within the trust are managed.
However, because you’ll retain control of the assets in a revocable trust while you’re alive, those assets will still be considered part of your estate for tax purposes.
Unlike an irrevocable trust, a revocable trust isn’t a sure thing when it comes to shielding your assets from creditors.
With an irrevocable trust, you, as the grantor, give up the right to amend or revoke the trust without your beneficiaries’ consent, which means giving up some control.
But it also means that any asset transferred to the trust during your lifetime will be removed from your estate for estate tax purposes if the trust is properly drawn up and administered. Those assets will also be protected from your creditors and your beneficiaries’ creditors.
Do you really need a trust?
If you need help figuring out which strategies and documents might be the right fit for you and your family, I recommend reaching out to your financial adviser and/or an estate attorney.
If retirement planning is about creating income for your life, legacy planning is about creating clarity for the people you leave behind.
If you’re worried about costs, you might find that getting help and putting the proper documentation in place can help save you money in the long run.
The sooner you get started, the better.
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
