Estate Planning 101

It’s not morbid or just for the rich — and the time to get started is now.

For many people, the words “estate plan” conjure up movie scenes of eager families awaiting readings of the wills of their wealthy relatives. It’s presumed to be the domain of the ultra-wealthy, and to discuss estate planning with one’s family is often dismissed as morbid, something unpleasant, and certainly not for the young.

None of this is true. In fact, having a frank conversation about estate planning is a gift, a kindness. And it’s a conversation that every family ought to have, whatever their financial situation or age might be.

Wills vs. Trusts

Many decades’ worth of films would have us believe that what we all need is a will. And this makes sense. After all, wills are contestable and often in dispute, so they make for great storytelling.

But in estate planning 101, your first step is to establish a living trust — so called because it is created while you’re alive and can be amended during your lifetime as your circumstances change.

A will is a statement of how you want your affairs handled and your assets distributed upon your death. But a will also becomes part of public record, so anything left through a will must go through probate court. In essence, a will leaves your decisions in the hands of a judge. A probate attorney will be needed by those left behind to help oversee the process, and all of this can wind up costing 2-4% of the estate in attorney and court fees.

A trust, on the other hand, offers more control over your assets than a will does — like its name implies, you can trust that your wishes will be heeded. This comes at a price, however: While you can usually make a will very cheaply, a trust must be done by an attorney, is far more thorough, and must be managed continuously. But the benefit is that it avoids probate entirely, helping to ensure that those assets are distributed immediately, without the need for further legal intervention. So while the initial expense of a trust is greater, the value it provides is priceless.

For families with minor children, this is particularly important because it ensures that whomever you wish to become the guardian of your children upon your death can do so right away, and the assets you leave behind for them are safely and rapidly disbursed to them.

If you do nothing else in the way of estate planning, at least set up a living trust.

Check Beneficiaries

Any time we start a new job, set up a new insurance policy, or establish a retirement account, we’re asked to provide names and information about our beneficiaries, the people we wish to receive our money in the event of our death. Then time passes — sometimes many years — and we forget what we wrote in that paperwork or whom we may have named as beneficiaries. For those who are divorced, remarried, have more children, or are predeceased by beneficiaries, this can become problematic.

Make it a habit to review these documents at least once a year to ensure that your beneficiary information is up to date. I’ve heard of many cases in which divorced couples didn’t update their life insurance information, and ex-spouses inherited entire policies, to the detriment of the new family. That’s a terrible mistake to make, and an easy one to correct.

Life Insurance

While we’re on the subject of life insurance, I highly recommend a term life policy, which, like its name suggests, involves paying a monthly premium for a specific term, or period of time. In the event of your death, your stated beneficiaries receive the coverage amount to subsidize the lost income you otherwise would have brought home. You can arrange for different levels of coverage. They’re also fairly inexpensive to purchase — for young people it can be as low as $25-$30 a month (or more once you reach age 40), depending on age and whether you are a smoker. The younger and healthier you are when you sign up, the cheaper it will be.

Think of a life insurance policy benefit as 20 years’ worth of income replacement. Multiple your annual salary by 20, and that’s about how much you’d need in coverage. For example, if you earn $50,000 per year, you would seek a policy with a death benefit of $1 million.

Of course, you might not be able to afford that. Many of us can’t. Don’t let that stop you from purchasing a policy — just buy something, as much coverage as you can afford. Anything will be helpful to the family members left behind. Usually, once people purchase an initial policy, they’re able to increase the coverage amount over several years as their circumstances change.

Communicate Your Plan and Information

Unfortunately, many people with detailed plans and many assets neglect a critical piece of the puzzle: communicating their financial information to those they will leave behind.

Take a bit of time right now and create a list of all your financial accounts, including institution names, account numbers, approximate balances, passwords, and access links if appropriate. Then share it with a trustee, or a trusted friend or family member. If you aren’t comfortable having it in your home or someone else’s, put it in a safety deposit box. In the event of your death, this person can act on your behalf to work with institutions and ensure that your wishes, as expressed through the trust, may be executed and money accessed without delay.

Review Your Finances

In the past, estate planning was heavily concerned with estate taxes, which historically might have eaten up a significant share of a person’s estate. These days, the estate tax exemption is quite high ($11M+ per person) — but that’s not to say the exemption won’t change. As the pandemic upends nearly every aspect of our economy, it’s possible that lawmakers will eye estate taxes as a possible source of revenue. My best advice is simply to keep an eye on the tax rate and work with a CPA to address any changes that might put you in a more advantageous tax situation — particularly if your estate is currently between $5 million and $11 million.

Regardless of what your financial picture looks like, estate planning should begin with a review of your finances with a CPA, who can identify issues to consider in terms of your assets and make recommendations about professionals to assist in your planning. Though we aren’t qualified to prepare estate documents here at Ludmila CPA, a one-hour meeting with an accountant can be life changing and a great step toward the estate-planning process.

Contact us today to see how we can help you get started. Stay well and continue enjoying your summer!estate planning