Our expert shares tips for the best practices to plan your estate.
During the holiday season, it's a good time to visit with friends and family and reflect on your values and desires for managing and disposing of your assets after your lifetime. While thinking about legacy planning can be unpleasant because it involves discussions about incapacity or mortality, it's an important aspect of good financial planning that shouldn't be ignored. An estate plan consists of four basic documents: a will, a living trust, a financial power of attorney, and a medical power of attorney and advanced directive. These documents should be well-integrated, funded, and aligned with your financial plan. Below, we'll address some common misconceptions and truths about these documents and how they work together to create a roadmap for your legacy.
What is it? A will is a legal document that outlines how you want your assets to be collected and distributed after your death. It also appoints an executor, who is responsible for gathering your assets, paying your debts, and distributing what is left to the beneficiaries you specify through the public court process of probate. A will also designates a guardian to care for your minor children upon your death.
Myth: "I have a trust, so I don't need a will."
Fact: Even if you have a trust, you still need a will.
In a perfect world, having a trust might be enough if you don't have minor children, but the world isn't perfect. For a trust to be effective, it must be funded appropriately, which means transferring assets from your individual ownership to your trust's ownership so that the trust can control the disposition of those assets.
However, sometimes we forget to transfer assets or the timing doesn't allow for it. For example, let's say you have a trust and you win the lottery. You're so excited that you start jumping up and down and suffer a heart attack before you can transfer your winnings to your trust.
Since you didn't transfer the winnings to your trust before your death, it doesn't dictate the distribution of that asset. Instead, your winnings would go through probate and the state would determine the distribution based on its laws. A will typically has a "pour over provision" that tells the judge to transfer any assets that you forgot or didn't have a chance to put in your trust.
What is it? A trust is a legal document that dictates the disposition of your assets at your death and also manages the assets owned by the trust during your lifetime, including during periods of wellness and incapacity. It's often called a revocable living trust because you generally maintain control over it during your lifetime while you have the capacity to do so. This means you can amend, revoke, or move property in and out of the trust as you see fit. Unlike a will, a trust handles the distribution of your assets privately, outside of the probate process.
Myth: "Trusts are only for the ultra-high net worth, so I don't need one."
Fact: This couldn't be farther from the truth!
It's a common misconception that trusts are only for the ultra-rich and famous, but the privacy, control, incapacity planning, and probate avoidance of a trust make it a desirable planning tool for many middle-class Americans.
Additionally, trusts can be particularly beneficial in situations with challenging family dynamics or if you want more control over your assets after your death.
Consider a simplified situation where a married couple has a net worth of about $1 million and passes away prematurely in a car accident, leaving two children in their 20s as beneficiaries.
Each child inherits $500,000. If the thought of two 20-somethings each inheriting half a million dollars outright sounds terrifying, a trust might be a good solution because it allows you to have increased control over the timing and conditions of distributions to beneficiaries. It's likely that most young adults don't have the financial acumen or life experience to make good financial decisions with that sum of money.
Financial Power of Attorney (POA)
What is it? A financial power of attorney grants someone the authority to make financial and legal decisions on your behalf, such as paying bills, managing investments, transferring property, or making gifts. After you pass away, the power of attorney is no longer valid and has no bearing on your wealth transfer.
Myth: "I have a trust, so I don't need a financial power of attorney."
Fact: Even if you have a trust, you likely still need a financial power of attorney.
The reality is that there are some assets that cannot be owned by your trust. For example, an individual retirement account (IRA) must be owned by an individual. If you become incapacitated, your trust would not have control over your IRA. There would be no one to oversee investment management, required minimum distributions, or general account maintenance, such as updating an address. To conduct business in this account, your loved ones would have to petition the court to appoint a conservator to manage your financial affairs. This can add unnecessary stress and expense during an already difficult time.
Medical Power of Attorney (POA) with Advanced Directive
What is it? A medical power of attorney indicates who you want to make medical decisions for you in the event you are incapacitated or otherwise unable to make them for yourself. An advanced directive, which is often included with a medical power of attorney, provides instructions regarding your desires about your care if you cannot make these decisions for yourself.
Myth: “My loved one is in the hospital and I'm their mother/father/spouse/sibling, so of course the hospital will give me information about their care”
Fact: Protecting patient confidentiality has become a paramount concern in the medical field, which could result in the inability to share information with family members.
For example, consider an 18-year-old student who has recently graduated from high school and left home for college. Although a student is still financially supported by their parents, a hospital might not be able to share information about their location, condition, treatment, etc. without a medical POA because they are over 18 years old.
A well-coordinated estate plan contains several documents that work together to ensure your wishes during and after your lifetimes are carried out appropriately. I hope this article brings clarity to some common myths and encourages you to consult with your estate planning attorney and financial planner.
About the author: Nicole Gopoian Wirick
Nicole Gopoian Wirick, JD, CFP®, is the founder and president of Prosperity Wealth Strategies, a registered investment adviser, in Birmingham, Michigan. Nicole is a fee-only financial planner who believes a successful advisory relationship involves compassionate conversations and planning tenacity.
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Nicole Gopoian Wirick, JD, CFP®, is the founder and president of Prosperity Wealth Strategies.