Do I need an estate plan? The answer is simple.
Are you an adult? Do you have stuff? Then you need an estate plan.
The real question is: “What is the right estate plan for me now?”
Estate plans can mean anything from a will or a trust to a beneficiary designation form. A good estate plan benefits you and those you love. It can save your heirs time and money, avoid taxes, protect children, and, most importantly, take care of you if you’re not able. Understanding this, let’s consider several important life events that merit looking at your estate plans:
- AGE OF MAJORITY (Not to be confused with maturity)
When your child turns 18, they are legal adults. In the eyes of the law, you as their parent can no longer make decisions for them, including health care decisions. You are not entitled to medical information either – even in an emergency. This is because the law—specifically, a statute enacted in 1996 called the Health Insurance Portability and Accountability Act (HIPAA)—prevents the disclosure of a patient’s health information without the patient’s consent. This is why every 18-year-old should have a healthcare power of attorney, allowing the named person to make healthcare decisions on their behalf. This document will also contain HIPAA authorization to ensure you can communicate with your children’s medical professionals. Just as important, a financial power of attorney allows your adult child to designate a trusted individual to make financial decisions if they cannot. Also, consider how your child’s accounts are titled. Checking and savings accounts should have a “transfer on death” designation. If they own life insurance or have a retirement account, be sure to they have beneficiaries designated.
- PURCHASE OF A HOME
The purchase of a home or other real estate is another reason for younger individuals to start their estate plans. Many believe a simple solution is to add a co-owner, allowing for a seamless transition of the property at their death. However, non-spousal co-ownership comes with many downsides: potential gift tax consequences; inclusion in any co-owner’s lawsuit settlements; the need to retain co-owner’s permission to sell or refinance property. A better solution, which avoids these issues entirely, is a will or trust which ensures the property passes at your death to your beneficiaries.
At the very least, you should look at your estate plans before a big trip. Particularly, if you are traveling for long periods of time. Lengthy vacations may encumber your ability to address important financial matters such as filing your taxes, selling real estate, running a business, or transacting accounts. Be sure to have a financial power of attorney in place which would allow your trusted individual to see to such matters. Other important estate planning documents include a will with guardians appointed for minor children and up-to-date beneficiary designations.
- FIRST CHILD
Undeniably, having a child prompts most parents to think about the guardianship and financial security of their child should they pass away. To avoid the probate court appointing a guardian for your child, you need a will which specifically nominates a guardian for your children. Without a will, the courts usually choose a family member. If you would prefer a close friend, for example, the court would have no way of knowing unless you designated that person in your will as your child’s guardian. Also, many parents purchase life insurance after the birth of a child. It’s important to consider who is named as beneficiary. Life insurance proceeds cannot be distributed outright to a minor child. Alternatives to naming a minor child as beneficiary include: 1) naming an adult guardian as beneficiary; 2) naming a Uniform Transfers to Minors Act account; or 3) naming a trust established for the child. Lastly, as mentioned earlier, every adult should have a financial power of attorney. This document can be a big benefit to your child by giving someone quick access to your bank accounts so they may continue paying your bills and providing for your child’s financial needs if you cannot. Without a durable power of attorney, a court order would be necessary and that takes valuable time.
- MARRIAGE OR REMARRIAGE
It’s important to consider how joining your life with someone else’s may impact how your estate will be managed. Married couples need their own wills and health and medical power of attorneys. Consideration should also be given to beneficiary designations and the titling of accounts. You may want to consider using a Bypass Trust which is a useful way to guarantee a portion of your assets flow directly to your beneficiaries in trust, protecting these assets for your children should your surviving spouse remarry. Speaking of remarrying, ensuring you have an estate plan which accommodates your blended families is imperative. The plan should address any gaps which might exist that could leave your assets in jeopardy. Not having a will, for example, could be problematic if you pass away. Without a will, your state’s intestacy laws would be applied – not your wishes. That means your assets may not go to your children or other heirs as would be your preference. Lastly, if either of you are bringing considerable assets into a second marriage or you want to minimize the potential for conflicts over asset distribution later, setting up one or more trusts could be a good idea.
It is critical to update any estate plan that was made with a former spouse. If you have an existing estate plan, odds are you have appointed your former spouse as either your patient advocate, financial power of attorney, executor, trustee, or beneficiary. You should update all beneficiary designations and payable on death or TOD accounts. Revoke or amend your existing will, or create a will if you don’t already have one, paying particular attention to the named guardian of any minor children. After a divorce, if you don’t already have one, setting up a trust to handle alimony and child support and to direct funds to your heirs is also a wise decision. Another wise decision may be establishing a trust which names someone other than your former spouse as trustee to control your estate assets for the benefit of your children if you die.
If you inherit assets, it is always a good time to evaluate your estate plans. A sudden influx of assets may change your opinions on how much and to whom you leave your assets. A substantial inheritance may require estate plans that minimize federal or state estate taxes. You may also reconsider giving your children a large sum of money outright and instead decide to leave their share in trust for their benefit. You may even wish to include or increase the amount you are giving to charity.
With the birth of your first grandchild, you may decide to include them in your estate plans too. Perhaps you wish to provide for their future college expenses or help with the purchase of their first home. 529 plans are a great way to allocate funds to a grandchild for college which allows you to control the assets until withdrawn for college expenses. It’s imperative that you designate a successor which stipulates who will take over management of the account if you pass away. Another important consideration may be avoiding generation skipping tax which could be levied in addition to gift tax when making a larger gift to grandchildren. Much, if not most, of these taxes can be avoided by making the gift to a trust for the grandchild’s benefit.
So, when should you start planning your estate? No matter your stage of life, the answer is right now. It’s never too soon to think about your loved ones and what will happen to them when you are gone. Even if a major life event has not occurred, it’s wise to review your estate plans every three to five years because your assets and tax regulations are always changing.
If you have questions about your estate plans, please contact Legacy Trust. We have experienced advisors who can guide you through the estate planning process.