By Blaine Thiederman MBA, CFP | 10-minute read Time
Estate Planning Related Topics
Why is Estate Planning Important?
How to Choose an Estate Planning Team
Taking Inventory of Your Estate
Creating & Updating an Estate Plan
The Role of Estate Planning in Your Total Financial Plan
Key Points
- The article provides an overview of the importance of estate planning and the key steps employees of Lockheed can take to get started.
- The first key point is that estate planning involves more than just creating a will or trust; it also involves considering issues such as healthcare directives, power of attorney, and tax planning.
- The second key point is that estate planning can help ensure that one’s assets are distributed according to their wishes and can also help minimize the tax burden on heirs and beneficiaries.
- The third key point is that working with a qualified estate planning attorney is crucial to creating a comprehensive and effective plan.
- The article provides additional context and advice for each of these key points, such as understanding the various estate planning tools and options available and considering the unique needs and circumstances of one’s family and financial situation.
- The author emphasizes the importance of taking action and getting started with estate planning, rather than putting it off or assuming that it is only necessary for the wealthy or elderly.
Disclosure: while we may have experience working with employees of Lockheed, in no way are we affiliated with these organizations nor are we endorsed as preferred partners. Including these logos doesn’t prove any level of skill at all; only that our experts have worked with professionals from these organizations and have experience with their employee benefits, equity compensation, and more.
Introduction
Estate planning can be overwhelming. It involves complex topics and decisions that cause many people to put it off altogether.
As overwhelming as it may seem, your estate plan is a crucial element of your overall financial plan regardless of your age or stage in life.
If you haven’t yet created an estate plan, or if you are wondering if you need to revisit it, you’re in the right place.
Below, we will walk you through the basics of estate planning and provide resources that can help you develop your financial plan, including our popular estate planning checklist.
Section 1: What is Estate Planning?
Commonly known as legacy planning, family wealth planning, or succession planning, estate planning is preparing for how you’d like your assets managed and distributed after death.
Many people equate estate planning with the creation of a Will. While a Will is certainly an important tool, the two are not synonymous. The need for various estate planning tools will change depending on your age and goals.
An estate plan should accomplish two overall goals and allow you to define:
- How will your assets flow
- Which individual(s) will assist with your personal and financial affairs
Section 2: Why is Estate Planning Important?
Estate planning is an important way to ensure that your assets pass as intended, and it is essential to reducing administrative and tax costs at death. Most importantly, it limits the financial and emotional burden placed on your family.
History is filled with famous celebrity examples of estate planning mistakes. Despite these high-profile cautionary tales, estate planning is not just for the wealthy.
While the tools and strategies may vary, some level of estate planning is appropriate for most people, no matter their age or asset level.
THREE WAYS DYING WITHOUT AN ESTATE PLAN CREATES PROBLEMS FOR YOUR LOVED ONES
1. Your family will face the time-drain and costliness of a difficult probate process.
Probate, the process by which your estate is distributed (and during which it passes to your family through intestate law if you don’t have an estate plan), can take a long time and involves many expensive fees. Families often find the probate process very stressful. While simply having a will won’t allow you to dodge probate altogether (that takes more in-depth estate planning) it does make the process easier. If you’re ready to spare your loved ones these inconveniences by sitting down with a financial planner to understand how to think about Estate Planning. We partner with Trust & Will as well as some local estate attorneys who can help you create a will, or utilize other estate planning tools to avoid probate, minimize estate taxes, ensure your wishes are respected, and spare your family from doubt.
2. Loved ones who aren’t related to you by blood (or are related by blood but more distantly) will not inherit anything from you.
Maybe you want to leave some of your assets to a family friend who you loved like your own child. Or maybe there’s something you want to leave to the young man you mentor at work. Maybe you want to leave everything to your partner, who has been by your side for many years but isn’t legally married to you. Without an estate plan, your estate will be distributed to your family in accordance with intestate law. Intestate law dictates that your estate will be split evenly among your closest living relatives. This can leave out people who are important to you!
3. They might not know what you would have wanted and it could cause arguments among them.
“Mom would have wanted me to have her ring. I just know it!”
“No! It was obvious she wanted me to have it!”
Don’t leave any room for doubt about your intentions. Arguments like these can escalate after death because emotions are already running high. These kinds of disagreements can create rifts in families that last for years. With a well-drafted estate plan, you won’t leave any room for doubt about your intentions, which also means less room for arguments between those you love.
Trust Vs. Will
What’s the difference?
What’s a Will?
It’s common for Trusts and Wills to be confused with one another. A Will, also known as a Last Will and Testament, is a legally enforceable document directing how you want your assets and property to be administered when you pass away. A Will also names an Executor, the person who will administer your assets.
Wills are the most common estate planning tool and have several key uses:
- Appointing an Executor
- Naming a guardian
- Naming a Trustee
- Providing for the creation of Trusts for a spouse or minor children
When creating a Will, it is important to be forthcoming with your attorney to help ensure that your assets are set up to be distributed as you intend.
Important Terms Associated with Wills
Probate asset
Anything that does not have a beneficiary designation or that passes by an operation of law.
Non-probate asset
Pass outside of your Will and directly to the individuals.
Decedent
A person who has died.
Intestacy
The condition of an estate if a person dies without a Will.
What’s a Trust?
A Trust is a fiduciary relationship where the Trustor gives another party, the Trustee, the right to the Trustor’s property or assets for the benefit of the beneficiary, who may be the Trustor or a third party.
Trusts provide legal protection to make sure the Trustor’s assets pass as they wish to the designated beneficiaries.
Trusts can be used to lay out how a person’s money should be managed and distributed while they are alive, or after they have passed. In some cases, you may want to consider creating trusts for minors or spouses who you do not want to have direct access to your estate assets. This may be applicable to someone with a mental illness or substance issue.
For a Trust to work, it is important to retitle assets, not just create the documents. Your attorney will assist you in doing that.
Additional Ways to Pass on Assets
There are other ways assets can be transferred to beneficiaries aside from Wills and Trusts.
- Beneficiary Designation (Transfer on Death Agreements): This allows you to name beneficiaries of particular assets (e.g. IRAs and investment accounts)
- Joint Tenants with Right of Survivorship (JTWROS): All joint owners have equal ownership and assets are immediately allocated to the remaining owners if one dies.
Keep in mind that you won’t have any control over your money post-mortem with these options. This could mean that your family could squander your money or misuse it. In some scenarios, these make sense or absolutely do not. Talk to an attorney before you make your decision.
Types of Trusts & Terms You Should Know
Trustee
The person responsible for administering any Trust assets
Revocable Living Trust
A Trust is created while living, where the owner (Trustor) can amend the terms or “revoke” it at any time. Revocable trusts permit you to deposit and withdraw funds from the trust whenever you want. Once you die, the revocable trust becomes “irrevocable” meaning that now, in order to make any withdrawals, you have to follow the rules of the trust.
The main reasons people create revocable trusts and irrevocable trusts are because they intend to:
- Avoid Probate
- Maintain control of the assets even once their lives are over for whatever reason.
The main reason why revocable trusts are much more popular than irrevocable is that you can still access the funds during your life and change your mind before your death.
Irrevocable Trust
A Trust where the terms cannot be changed. Given the binding nature of the Trust, these are generally seen as being outside of a grantor’s estate for tax purposes.
Charitable Trust
Allows donors to set aside assets for one or more charities.
Special Needs Trust
A specialized Trust allows the beneficiary with special needs to receive essential needs-based government benefits.
How do your beneficiaries withdraw from your trust when you die?
When you die and your successors provide the trustee with your death certificate, the trust would have to be amended to change it from revocable to irrevocable and also change who’s allowed to make withdrawals from the trust (aka, change who is listed as “trustee”).
Why must attorneys be involved in updating your trust after you die?
A trust has people who are designated as “trustees” who legally can withdraw money from the trust and take ownership of it. Typically, when you establish a trust, you list “successors” who are legally allowed to withdraw money from the trust to benefit themselves once the original creator(s) of the trust (the grantors) die(s). If you don’t change who legally can withdraw and the grantors died, then no one would benefit from the trust because no one could legally access the funds.
Section 03: How to Choose an Estate Planning Team
The first step in creating an estate plan is to choose experts that you trust.
This area of the law can be quite complicated, so it’s important to find an attorney who specializes in estate planning.
Using an experienced attorney, instead of taking a DIY approach or using an online service, ensures that your assets pass as you intend.
Another key member of your planning team should be an accountant. He or she will understand the potential tax consequences of your estate plan.
Because estate planning is about more than just a Will, your financial advisor should be a part of your estate planning team. He or she will ensure your estate plan strategically fits into your overall financial plan.
It is important to be prepared when you sit down with an estate planning professional. Our estate planning checklist can help you prepare for your meeting so that your team can understand your current situation and the goals you have for your estate.
Section 04: Taking Inventory of Your Estate
Before you meet with your selected professionals, think about who in your life should fill each of the important roles within your estate plan.
You will need to assign a Power of Attorney, an Executor, a Trustee, and guardians if you have children.
These people will be responsible for fulfilling your wishes. It is important to communicate your goals and the role you’re asking them to play in the execution of your estate plan.
01 Power of Attorney
A Power of Attorney (PoA) is a signed document that allows an individual to make certain financial and legal decisions for you.
There are three types of Powers of Attorney:
| Non-Durable | Often used in business relationships; expires if you should become incapacitated or incompetent |
| Durable | The most common type used in estate planning; survives incapacity, expires upon death |
| Springing | Most difficult to administer (requires proof of incapacity); only effective upon incapacity |
Once you pass, the Durable Power of Attorney ceases to be effective, and the person you designate in your Will as your Executor will now take care of your affairs.
02 Executor
The Executor has at least four key responsibilities:
- Gather assets when you pass
- Administer your estate with the court
- File estate tax returns
- Ensure your estate is distributed under the terms of your Will
The Executor will handle the distribution of your probate assets.
03 Trustee
While an Executor’s role may be over once the estate has settled, the Trustee’s responsibilities could go on for some time. The Trustee is the person responsible for any Trust assets.
A Trustee’s duties may include filing tax returns for the Trust, investing assets in the Trust, and distributing the assets according to your wishes.
04 Guardian
A legal guardian is responsible for the physical care, health, education, and welfare of your children until they reach the age of 18.
How Taxes Can Play a Role In Your Estate Plan
Tax implications are key considerations when building your estate plan. Here are a few things you should know about estate taxes.
What are Estate Taxes?
An estate tax is the amount of money an heir pays on their inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. Estate tax generally does not apply to assets passed to a surviving spouse or charity.
What is the Estate Tax Exemption?
The current federal estate tax exemption sits at $11,580,000 for individuals and twice that amount for couples, up from $5.49 million per person in 2017.
Thanks to a portability clause, even after one spouse dies, an estate of less than $23.16 million would not be taxed when the surviving spouse dies.
There is a 40% maximum tax rate on estates facing estate tax.
In addition to the federal estate tax, some states issue a state-specific estate tax. These generally have lower exemption amounts than the federal law, resulting in more people being affected.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 more than doubled the previous estate tax exemption. The exemption will stay at $11.18 million (adjusted for inflation) for individuals until 2025 when it will return to its previous limits.
The estate tax in its current form affects less than 0.1% of all households. Still, for elite individuals with estates in the $5-$11 million range (i.e. those whose exemptions expire after 2025), there is tax planning work to be done.
Section 05: How and When To Create & Update Your Estate Plan
There are a few common reasons why people delay or altogether avoid estate planning:
- It forces you to confront your own mortality. Most people just aren’t comfortable with thinking about death, especially their own.
- It requires you to make difficult decisions that may impact the people closest to you.
While there’s always a reason to delay planning, not having an estate plan can prevent you from achieving your goals. Ultimately, it will put unnecessary stress on your family.
The first step in creating an estate plan is assembling your estate planning team, this includes selecting an estate planning attorney. Different attorneys have different price ranges, but you can expect a standard Will to cost anywhere from $700 to $1,500 or more.
Included in our guidebook, is an estate planning checklist to help you prepare for your first meeting with your estate attorney.
Your financial advisor should also be involved as you work through the estate planning process to ensure that all of your financial goals are being met.
Life events, tax, or legal changes can cause your estate plan to become outdated, so it’s important to keep your estate plan up-to-date as your life changes.
Section 06: The Role of Estate Planning in Your Total Financial Plan
Creating and maintaining a thoughtful estate plan is the most effective way to transfer wealth to future generations.
It is important to remember, however, that your estate plan is just one piece of your total financial plan.
Today’s complex financial markets, new tax laws, and your unique planning needs require that all of your advisors are working in a coordinated way to help you achieve your financial goals.
The Keys To A Successful Financial Plan
- Investment Management
- Financial Planning
- Estate Planning
- Tax Planning
- Asset Protection
- Trust & Custody Services
