When it comes to estate planning and probate, there seems to be a lot of confusion as to what actually takes place when a loved one passes away. While almost every estate goes through probate upon death, it’s not very difficult for most of us to ensure a smooth process to both avoid estate taxes and ensure that our loved ones inherit the assets that we desire they do. In the next few paragraphs, I’ll explain what I believe to be the pillars of estate planning and hopefully make the probate process as easy as possible.
Pillar 1
Will - A Last Will & Testament states how you would like to distribute your assets after your death, including who should receive what. A will nominates the personal representative (formally called executor) who will administer your estate, and trustees if the will has a trust incorporated in the document’s provisions. If you have minor children, a will also allows you to designate who will care for them if both parents pass away before they reach adult age.
Pillar 2
Living Will with health care directive – You may hear slight variation of this in different states, however, a living will provides health care instructions to physicians in the event of a terminal illness or persistent vegetative state. You will also be able to appoint a health care proxy or health care power of attorney, who can work with the doctors to ensure your wishes are followed.
Pillar 3
Durable Power of Attorney – This document allows you to elect a representative to sign legal documents on your behalf. You appoint and authorize someone else (the agent, referred to as an attorney-in-fact) to make financial and business-related decisions on your behalf. This authorization may be immediate — so once signed, your attorney-in-fact can do everything you may do financially (e.g., reallocate 401(k) plan asset allocation, change beneficiary of a life insurance policy, access bank accounts, etc.). This is generally referred to as an “immediate financial power of attorney.” Alternatively, the authorization may only be effective when you are proven, by your physician in writing, to be currently unable to manage your finances. This is generally referred to as a “springing financial power of attorney.” You may revoke your financial power of attorney at any time during your lifetime as long as you are mentally competent to do so. A financial power of attorney expires upon your death.
Pillar 4
Proper Beneficiary Designations - This is one of the most misunderstood aspects of proper estate planning. Beneficiary designations will supersede your will. Let me say that again, your beneficiary designations will supersede your will. I’ve often run into situations where a client has gotten divorced and updated their will, but not the beneficiary designation on the 401(K). Not only is the proper person important, but anything with a named beneficiary bypasses the probate process entirely and can be transferred via the financial institution it is held at.
Pillar 5
Life Insurance and/or Long-Term Care – Proper estate planning will include one if not both of the above insurances. Life insurance, particularly with young children can ensure that your plan is self-completing. If you are the primary income provider, life insurance can help continue to fund household expenses, college savings etc. for your family. It can also provide immediate liquidity upon an unexpected death as it bypasses the probate process.
Long Term Care on the other hand provides protection against your estate assets should you run into a medical event and require care. LTC insurance can provide the necessary funds to pay for any type of care you need to receive without invading the assets that you worked hard to save and accumulate
Pillar 6
Trust (This is not mandatory but based on your unique situation) In some cases, depending on the size of the estate a trust may be involved. However, it’s important to note that the current federal estate tax exemption is $13.99 million dollars per individual, meaning a married couple can shield up to $27.98 million dollars from federal estate tax. More important to be aware of is your state, as those estate and/or inheritance tax laws vary. For example, in NJ where I live, there is no estate tax but there is a potential inheritance tax. I say potential as NJ lists multiple “classes” of beneficiaries in which you may be excluded from all inheritance tax or pay as much as 16%. It’s crucial to understand your state laws when it comes to estate planning.
Estate Planning is never a fun conversation, but it is a necessary one. Taking care of the pillars I mentioned can help ensure a smooth transition for your family during a difficult time AND keep the courts out of it as much as possible. Keep in mind, I have also partnered with Trust and Will to provide a simple option to get your basic estate documents completed. A link can be found on the client portal page of our website. This a value add only for clients of Birds Eye Wealth Planning.
As always, please don’t hesitate to reach out to me with any questions, and feel free to share this with anyone who may benefit.